Reddit investors’ margin debt could intensify stock market crash

Since mid-2020 margin debt as a percentage of U.S. GDP has skyrocketed to levels never seen before.

As retail investors, inspired by online forums such as Reddit, leveraged-up in an attempt to increase exposure to soaring stock prices, margin debt reached 4.5 percent of GDP late in 2021.

This surpassed the 3.5 percent seen at the peak of the dot com bubble and 3 percent seen just prior to the Global Financial Crisis.

Now, with many U.S. large cap growth stocks falling sharply in 2022 there are fears of a significant liquidation event, which could lead to a full-scale stock market crash.

“If margin calls are met with forced liquidation, we may not have reached the bottom yet,” says hedge fund manager, Antipodes.

Margin debt as a percentage of GDP has fallen to around 3.5 percent since the high in late 2021. Such sharp falls over short periods of time have historically seen both the S&P 500 and margin debt levels decline significantly further.

“Retail is only now starting to feel the pain of portfolio losses relative to February 2020 pre-COVID prices,” said the hedge fund manager.

“May is the first month since the pandemic began that retail investors have been net sellers in the market and should this continue, retail-focused stocks will remain under pressure.”

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