In June, investors borrowed a record $1.5 trillion against their brokerage accounts, according to the Financial Industry Regulatory Authority, that is the highest margin debt level on record. And while margin debt tends to rise with the stock market as portfolios become more valuable, investors have more collateral available and greater capacity to borrow, the speed of this collateralization should be a warning sign for the markets.

Margin debt rose 49% from a year earlier. Since the late 1990s, comparable surges have appeared around some of the market’s most speculative periods, and none of them ended well for the market. In March 2000, margin debt was growing at the rate of 80.5% from the previous year. The S&P 500 peaked that same month just before plunging about 78% by October 2002. In July 2007, borrowing was up 62.7%, just three months before the market reached its peak before the 2008 financial crisis. In March 2021, margin debt was growing at the rate of 71.6% from twelve months before, as low interest rates stimulated increasing leverage. The market continued rising higher for several months before entering the 2022 bear market.

It is important to understand that margin borrowing is not a tool fit for short-term timing, and rapid growth can continue for months before the market turns, but the current trend does suggest that investors are becoming more dependent on leverage to support their positions.

Here, it's also important to understand leverage dynamics differences between a rising and declining market. When stocks rise, investors can borrow more against their appreciating portfolios, whereby the additional borrowing can then be used to buy more securities, feeding into the rally. But when prices decline, collateral values fall, and brokers demand more cash to collateralize the margin. This can lead to a rapid increase in margin calls, and so to a rapid folding of the leverage-based rallies as margin call sales push prices lower and create additional margin pressure across the market.

Take, for example, the 2000 dot-com bubble. As the bubble burst, the annual change in margin debt eventually fell deeply into negative territory, and the 80.5% growth eventually hit -41.7%, just a year later in March 2001. Similarly, in 2022, as the Federal Reserve raised interest rates and the market faced liquidity pressures, margin debt growth fell to -33%.

Although a perhaps better way to judge the current level of speculation is to compare the growth in margin debt with the return of the stock market itself. If borrowing rises at roughly the same pace as investors’ portfolios, then the increase may reflect higher asset values, but a large gap would suggest that investors are adding leverage faster than their collateral is appreciating. Today, this gap is unusually large, with margin debt growing at about 49% from last year, while the S&P 500’s return is only at the rate of 20.9%. The difference is close to 28 percentage points, which places the current leverage-to-returns level near the higher end of readings recorded since the late 1990s.

Similar gaps between leverage growth rates and market returns have appeared in 2000, 2007, and 2021, and in each case, borrowing was growing more than 20 percentage points faster than the market near the later stages of a speculative cycle. And while the sample is small, the relationship is not precise enough to call a market top, as margin debt can rise because investors are optimistic and because their portfolios are more valuable. It is also possible for leverage to remain elevated while stocks continue climbing.

Still, the record level of margin debt today mostly reflects the size and value of the market. Yet, the current acceleration is worth watching as investors are increasing their borrowing much faster than stock prices are rising, leaving the market more exposed if momentum weakens.