2020 has been an interesting year: we watched the unforeseen effects of the pandemic play out on the markets along with the rise of dark horse stocks (such as Tesla). Adding to the confusion was the long-overdue correction in markets due to concerns that certain tech companies were overvalued. Effective comparison of trends requires a reference point: we choose 2019 as that point in time.
Markets vs Margin Balances
To establish an indicator of investor preferences, we consider the debit and free credit balances in customers’ margin accounts as reported by FINRA. The Financial Industry Regulatory Authority (FINRA) is an independent organization that writes and enforces the rules governing registered broker-dealer firms in the United States.
- Debit balance in a margin account is the total owed by a customer to a broker (for funds borrowed to purchase securities);
- Free credit balance takes into account all transactions and margin requirements (this is the amount of capital available for withdrawal).
The market being considered is the S&P 500, specifically its monthly delta (i.e. the percentage rise/fall in a calendar month).
The market being considered is the S&P 500, specifically its monthly delta (i.e. the percentage rise/fall in a calendar month).
In 2019, a fairly typical picture of the trends in balances versus the market can be seen: