Nick
Restaino is bullish on stocks again after January’s dramatic rebound and is
using money borrowed against his investments to buy shares of popular
technology companies such as Nvidia Corp.
and Roku Inc.
The
22-year-old student in Doylestown, Pa., bought shares of those stocks in recent
weeks and reversed short bets he made in December. He did it with cash on hand
and about $15,000 in borrowed money, roughly doubling his buying power.
“A
lot of stocks that dipped...are starting to regain some of their value,” said
Mr. Restaino, adding that he plans to buy more shares using additional margin
debt. “This is an opportunity to take advantage of the large amount of margin I
have.”
Mr.
Restaino isn’t alone. In the fourth quarter, investors trimmed the amount of
margin debt they used to buy stocks at the fastest pace since the financial
crisis. But some Wall Street and brokerage executives say those loan levels
stabilized or moved higher last month as the S&P 500 rebounded, posting its
best January performance since 1987.
Margin
debt, which is generally considered a gauge of investor confidence, tumbled
more than $90 billion in the fourth quarter to $554.3 billion, the lowest tally
since December 2017, according to the Financial Industry Regulatory Authority.
Although
the pace of the decline was jarring, analysts at Bank of America Merrill Lynch
and other firms say the pullback supports the case that the stock market has
bottomed and is poised for a rebound—albeit with ongoing spikes in
volatility—similar to other recoveries following drawdowns in February 2016 and
September 2011.
“We’ve
seen the [margin debt] numbers come back a bit as the S&P 500 has rallied
into 2019,” said JJ Kinahan, chief market strategist at brokerage firm TD Ameritrade HoldingCorp. , adding that fluctuations in margin debt
tend to be highly correlated with the broad index. “As the S&P 500 drops,
you’ll see margin levels drop. As it comes back, it recovers in a similar way.”
Investors tend to be more
willing to take loans against investments that are rising in value, but such
debt can amplify gains and losses, leaving investors vulnerable in a market
pullback such as the one in the fourth quarter.
Mr. Restaino, for example, says he
has access to $50,000 in available margin debt, including what he has invested
so far, pledged against roughly $20,000 in equity. But if the value of his
collateral shrinks enough, brokers can demand repayment. If the margin call
isn’t met, the securities backing the loan are sold and he would responsible
for any remaining balance.
At
TD Ameritrade., December’s decline in margin balances was the most pronounced
since the collapse of Lehman Brothers Holdings Inc. in 2008, said Tim Hockey,
the firm’s chief executive. “That trend is reversing because people are net
buyers” now, he said.
Rival
brokerage E*Trade Financial Corp.
also says margin debt has stabilized, with balances in January expected to be
near December’s $9.6 billion sum. “It’s really the indicator or the lead
indicator of investor confidence in the marketplace,” E*Trade CEO Karl Roessner
told analysts on a conference call last month. “That balance on our side has
been up a little bit.”
An
increase in margin debt would help rejuvenate a bull market that had been on
the brink of collapse in December by adding more buying power, analysts say.
The S&P 500 remains down 7% from its September record but has rebounded 16%
from its Christmas Eve low. Renewed faith in the U.S. economy and comments from
Federal Reserve Chairman Jerome Powellsignaling a
pause in the central bank’s campaign of interest-rate increases have
eased investors’ fears of an imminent recession. Sentiment has been further
stoked by strong corporate profits and attractive valuations.
But
most Wall Street analysts say the stock market remains vulnerable to many of
the same risks it faced last year, leaving major indexes susceptible to another
pullback that could trigger another drawdown in margin-debt balances.
Trade
tensions between the U.S. and China that rocked stocks last year remain
unresolved, even though President Trump gave an
upbeat assessment of a recent meeting between leaders of the two
countries. And companies from Ford MotorCo. to Caterpillar Inc.
to 3M Co. have offered
weaker-than-expected outlooks for the year, which could further hamper an
already slowing U.S. economy.
Margin
balances peaked in May 2018, hitting a record $668.9 billion, according to
Finra data. But hawkish comments from Mr. Powell last year about the pace of
potential interest-rate increases and worsening relations between the U.S. and
China on trade policy contributed to a five-month decline in margin debt that
pushed balances down 17% through December.
Still,
margin debt remains at elevated levels after the long-running market rally,
said Devin Ryan, a brokerage analyst at JMP Securities, who also said he
expects balances to register a tick higher in January. Margin debt across Wall
Street accounted for about 1% of the S&P 500’s total market value in
December, down from a peak of 1.4% in July. That is still well above a monthly
average of 0.2% in Goldman Sachs data going
back to 1997.
Previous pullbacks have been more devastating on margin-debt balances,
according to Goldman’s data. In the wake of the dot-com bubble in 2000 and the
2008 financial crisis, net margin debt stood as low as minus-0.6% and
minus-1.8%, respectively, relative to the S&P 500’s market cap.
After
such an abrupt decline in margin debt at the end of 2018, investors “may be a
little more timid” when it comes to taking on more risk, Mr. Ryan said. But
given the tendency for investors to increase leverage as markets rise, he said
he expects margin balances to expand back to historic highs.
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