Surge at S&P driven by investors borrowing record amounts

US stocks are being propelled to fresh highs by investors borrowing a record amount of money in a high stakes gamble that is raising concerns over the potential for a sharp correction in the five-year bull run. With the S&P 500 registering a fresh closing peak of 1,859.45 last week, margin debt – money borrowed to buy stocks – hit a record level in January, according to data from the New York Stock Exchange.

Peaks in the use of borrowed money have in the past been a precursor to big bear markets and is viewed as a warning sign. Though margin debt has been hitting record highs in recent months, it now stands at $451 billion on the NYSE, a rise of more than 20 per cent over the past year and above 2007’s peak of $381 billion. Five years ago it hit a low of $173 billion.

In past market peaks, excessive levels of margin debt exacerbated the subsequent slide in stocks, as investors were forced to quickly sell their holdings as prices fell, sparking a nasty downward spiral. – (Copyright The Financial Times Limited 2014)