By Andrew Welsch

Margin trading has hit a feverish pace in the U.S.

Debit balances in investors' margin accounts reached a record $937 billion as of January. That's up 33% from $701 billion in January 2024, according to brokerage industry self-regulatory organization Finra, which publishes monthly data. Over the same period, the S&P 500 gained 24.7%.

Margin trading, in which investors borrow funds from their brokerage firms in order to buy stocks, can amplify returns, but it is also risky, because investors use their securities portfolios as collateral.

For that reason, record levels of margin debt can be a warning sign. But they might not be a cause for concern yet, says Jennifer Hutchins, co-CIO at Avantax, a unit of wealth management company Cetera.

"As wealth grows, it is normal that debit balances would grow, if nothing more than to maintain a fairly stable percentage of debt," she says. "This margin balance growth is not surprising, seeing the tremendous growth we have in equities, namely the S&P 500 over the last several years. History has shown that margin balances tend to grow in tandem with the S&P 500."

Finra's data show a steady increase in investors' use of margin last year, with debit balances rising from $701 billion in January to $809 billion in May. It stayed at that level during the summer and then spiked as the U.S. presidential election neared. Markets also shot up late last year thanks to the so-called Trump bump, when investors bought shares of companies and assets they expected to benefit from policy changes under the second Trump administration.

Hutchins also points to Federal Reserve data from December showing that household wealth has increased by $49.4 trillion since 2020. "While lower-income families may be facing some challenges, the top 20% of earners drive the majority of consumer spending," she says. Given that backdrop plus low unemployment, U.S. consumers appear to be in a position to sustain spending and current margin debt may not be as concerning as the numbers might seem, she says.

Still, investors should keep tabs on margin debt. José Torres, senior economist at Interactive Brokers, says he's watching to see whether investors cut back on their use of leverage, which could indicate a coming market decline. It has happened before. In November and December 2021, investors began reducing margin balances; at the start of 2022, the S&P 500 and other indexes tumbled.

Recently, markets have taken some lumps as investors have fretted about high valuations for stocks, the potential impact of tariffs, and potentially resurgent inflation. A Charles Schwab survey in January of active traders found a slim majority (51%) were bullish (Investors under age 40 were the most optimistic.), and two-thirds thought the market was overvalued. In February, consumer sentiment soured. The University of Michigan's survey of consumers dropped to its lowest reading since July 2024, and expectations of inflation for the year ahead rose to 4.3% from 3.3% in January.

"There are a lot of risks and uncertainties out there, and uncertainty is not good for animal spirits," Torres says. "There are worries about earnings being able to grow double digits. So there could be some volatility this year and maybe next."

Some risk assets have sold off this year. Prices of cryptocurrencies have been falling in recent weeks after soaring to record highs late last year. Bitcoin is down more than 20% from an all-time high of nearly $110,000 to about $87,000. The S&P is up just 1.5% this year while the Nasdaq is down 1%. When Finra releases its next batch of margin data in March, it might show that investors are paring back their use of the practice.

Write to Andrew Welsch at andrew.welsch@barrons.com

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February 27, 2025 11:13 ET (16:13 GMT)

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