The technology bubble (and bust) in 1999 and 2000 is apparent from the chart as is the next market bubble which culminated in a peak leverage ratio (for that time) in mid-2007. The ratio hit 4.0 at the end of November 2017 but sadly we cannot update further as the New York Stock Exchange in its wisdom (!) has ceased to publish the data.
We do, however, have access to broader margin data published by the Financial Industry Regulatory Authority (FINRA) and it indicates that margin debt outstanding grew by 6% between November and January before falling slightly in February. Relative to the latest personal disposable income data available ( January) the debit balances in customer margin accounts (FINRA data) amounted to 4.5% of disposable personal income.
Leverage comes and leverage goes and when it does the latter it can lead to a scary market environment. Given the current market volatility it would take a brave person to forecast that we will not see a re-run of the peaks and troughs of the last twenty years.
Inflation is considered to be a major threat to the market and it is undeniable that it is creeping up in many parts of the world – including the US. Of the three key inflation components: services, durables and non-durables, the latter two are the most volatile but by far the more important of the two in the US is non-durables (it makes up roughly 30% of the index). The main constituents of non-durables are food, clothing and oil and gas.
A useful exercise is to plot the movement in the price of oil relative to the rate of inflation. It generates a remarkably strong correlation (see below).
US: Oil Prices and the Rate of Inflation