The current bull market, which started in early 2009, has been called “the most hated bull market in history.” It seems investors have been waiting in vain for that other shoe to drop only to see the market march higher with nary a correction.
Stocks climb a proverbial wall of worry, and negative sentiment among rank-and-file investors is actually a contrarian bullish sign. It is when sentiment gets one-sidedly bullish and investors throw caution to the wind that you know a major top is near.
But with the S&P 500 now sitting near all-time highs… and tripling in value from its 2009 crisis lows… is it really fair to call this rally “hated”?
Let’s take a look at investor trading on margin. When investors are feeling bullish, they are a lot more likely to trade aggressively… and to borrow money to do it.
As you can see in the chart, investor margin debt as a percentage of market cap does indeed tend to surge leading into a major market top and tends to fall dramatically during a market decline. We saw investor margin debt jump from less than 1% of market cap to nearly 2% during the great 1990s tech bubble. And it had another major spike during the bull market of the mid 2000s.
Today, we certainly don’t see a lot of investor enthusiasm for margin trading, and margin debt is actually trending lower. We’re still at levels that are high by historical standards, but much of this can be explained by two factors:
- Ease of margin trading with discount online brokers
- Falling interest rates over the past 30 years…and particularly over the past 6 years.
Remember, the Fed has kept short-term lending rates at close to zero for six years now, so it’s natural that investors will borrow more aggressively on margin. “Free money” makes carry trades that wouldn’t be profitable under “normal” conditions worth doing. Seen in this context, today’s margin debt levels are far less impressive and certainly far less indicative of investor enthusiasm.
So, at least by this metric, our bull market today really is unloved, at least by the standards of recent major tops.
