NEW YORK – Investors are borrowing at a record pace to sink into the stock market, and the trend is raising concerns on Wall Street about what might happen if a major correction occurs.
The amount of margin debt, which is how brokers define this kind of borrowing, hit a record $285.6 billion in January on the New York Stock Exchange. Such a robust appetite, amid a backdrop of complacent market conditions, could leave investors badly exposed if major indexes are snagged by a market decline. Some could find themselves forced to sell stock or other assets to meet what’s known as a margin call – when a broker in effect calls in the loan.
Bulls and bears can continue to debate the direction the markets will take in 2007. But, one fact remains: The last time margin debt hit this level was at the height of the dot-com boom in March 2000, just ahead of a two-year decline.
“I don’t think this is saying you should suddenly run into your bomb shelter,” said Hugh Moore, a partner with Guerite Advisors. “Nevertheless, I think it is saying there is exuberance out there, a feeling from investors that ‘I don’t want to miss the bus.’ “
That usually signals “the bus has already left,” Moore said.
Margin debt dropped to less than half its peak between March 2000 and October 2002, mirroring a plunge in stocks.