Reddit Investor Margin Debt May Intensify Stock Market Crash
Since mid-2020, margin debt as a percentage of US GDP has skyrocketed to levels never seen before.
As retail investors, inspired by online forums such as Reddit, leveraged leverage to try to increase their exposure to soaring stock prices, margin debt soared to 4.5% of the GDP at the end of 2021.
This exceeded the 3.5% seen at the height of the dotcom bubble and the 3% seen just before the global financial crisis.
Now, with many US large-cap growth stocks down sharply in 2022, there are fears of a major sell-off event, which could lead to a full-scale stock market crash.
“If margin calls result in a forced sell-off, we may not have bottomed out yet,” says hedge fund manager Antipodes.
Margin debt as a percentage of GDP has fallen to around 3.5% since peaking at the end of 2021. Such sharp falls over short periods have historically seen both the S&P 500 and margin debt levels decline. considerably more.
“Retail is only now starting to feel the pain of portfolio losses compared to February 2020 pre-COVID prices,” the hedge fund manager said.
“May is the first month since the start of the pandemic where retail investors are net sellers in the market and if that continues, retail-focused stocks will remain under pressure.”
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