MARGIN DEBT, FED POLICY, AND RECENT AMERICAN STOCK PRICE TRENDS © Leo Haviland March 18, 2013

Many observers point to booming corporate profits as a key reason for the splendid rally in United States stocks since March 2009’s dreary depth. The Federal Reserve’s generous highly accommodative monetary policy since late 2008, highlighted by sustained rock-bottom interest rates (yield repression) and several rounds of spectacular money printing, nevertheless coincides with this climb in corporate profits and the marvelous S+P 500 advance.

Many marketplace clairvoyants, including quite a few regulators, worry little about borrowing levels (and leverage) in the context of the wonderful ascent in American stocks. However, they should.

Soothsayers should examine New York Stock Exchange (NYSE Euronext) margin debt levels alongside the timing of Federal Reserve policy innovation and very important trend change points in the S+P 500. In recent years, pinnacles of NYSE margin debt have occurred close in time to those in US stocks; valleys in that debt roughly have coincided with S+P 500 troughs. Glancing back to the 2000 stock top and the depths of 2002/2003 shows a similar pattern. For the recent bull trend in American since first quarter 2009, underscore the Fed’s policy actions (and a couple

of European Central Bank ones) alongside these turning points in margin debt and American stocks. The most recent statistics (for January 2013) and the probable current margin debt levels are very elevated from the historical perspective. They consequently should concern marketplace watchers, even if many sentinels retain faith that there remains scope for even more margin debt and that lax Fed policies and booming corporate profits will persist.

Anyway, survey NYSE margin debt, Fed actions, and S+P 500 trends together. As in the joyous rally to the highs in US equities in 2007-08, judging from the NYSE margin debt statistics, a fair amount of leverage probably has encouraged the bull move in US equities since the March 2009 lows. That includes the recent S+P 500 spike since June 2012. The friendly Fed and its devoted allies probably deserve a hefty share, though not all, of the credit for these margin borrowing leaps since the equity abyss of first quarter 2009. And especially if US Treasury yields are low, why not search enthusiastically for yield (return) in US stocks?

FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Margin Debt, Fed Policy, and Recent American Stock Price Trends (3-18-13)