Are Margin Debt Levels Telegraphing the Stock Market's Future?

Given the current high level of volatility in the stock market, I wanted to revisit a metric that reveals a great deal about investor sentiment, the size of the outstanding margin debt.  This is an update to postings that I have done over the past year.

Here is a graph showing the growing level of margin debt since January 2000:

Notice how the level of margin debt has pretty much grown steadily since the end of the Great Recession?  In August 2014, there was $463.018 billion in margin debt, the third highest level ever after February and June 2014 when margin debt hit $465.72 billion and $464.311 billion respectively.  For comparison, one year ago in August 2013 there was $382.926 billion in margin debt for a year-over-year increase of 20.9 percent.  Two years ago in August 2012, there was only $286.615 billion in margin debt for a year-over-year growth rate of 33.6 percent.  The high level of margin debt would suggest that investors continue to feel that the market is a safe place to invest and that the likelihood of a significant correction was minimal, at least in the early part of 2014.

One can get a sense, however, that investors are becoming somewhat skeptical of the market upside since the beginning of 2014 as we can see on this graph: 

Since January 2014, the amount of outstanding margin debt has more-or-less flatlined.  So far in 2014, margin debt has only increased by 2.6 percent, a fraction of the growth levels in the same periods in both 2012 and 2013.

Thanks to the Federal Reserve and the Bank of Canada, interest rates on margin debt are at all-time lows.  This along with near-zero returns on fixed income investments and investors' short memories of the 2008 - 2009 carnage in the stock market lured many Americans and Canadians to borrow to invest in what has appeared to be a sure thing, dumping billions of dollars into riskier investments where capital gains are not assured.

Perhaps the stalled growth in margin debt over the past eight months was the signal that, at least for now, the stock market is unlikely to experience the growth levels that it has experienced over the past two years, particularly given the weakness in most of the global economy.