- Speculation in the stock market has been flushed out after FINRA margin debt cratered by $329 billion.
- The massive de-leveraging by investors sets the market up for a positioning shift if a soft landing materializes in the economy, according to Fundstrat.
- "Margin debt a percentage [of] market cap now 1.59%, matching 'dot-com' 2002 25-year low," Fundstrat said.
One measure of stock market speculation among investors has plunged to levels not seen since the low of the dot-com bubble burst in 2002, according to a Friday note from Fundstrat's Tom Lee.
FINRA margin debt, which measures the amount of loans taken on by investors to buy stocks, has plunged by $329 billion since the October 2021 peak.
The absolute decline in margin debt from $936 billion in October 2021 to $607 billion today exceeds the declines seen during the 2008 Great Financial Crisis and the 2001 dot-com bubble burst, in which margin debt fell by $216 billion and $164 billion, respectively.
On a percentage basis, today's 35% decline in margin debt from the peak does not exceed the more than 50% declines seen in 2008 and 2001, but as a percentage of total market cap, it does.
"The level of margin debt to market cap is at 1.59% and same as dot-com trough," Lee said.
The extreme de-leveraging isn't a surprise to Lee given that investors have poured trillions of dollars into money market funds over the past 15 months, which is a sign that investors remain risk-averse following the steep decline they experienced in stocks.
"Investors have de-risked and de-levered to a significant extent," Lee said, adding that investor positioning in the stock market is "far more bearish than most appreciate."
And it's that de-levering by investors that could set the stock market up for a continued rally if a soft landing in the economy materializes, Lee said, as investors will have plenty of fire power between cash on the sidelines and the ability to increase their margin loans to buy stocks.
"There is a far greater positioning shift ahead if the data ends up proving to be 'soft landing," Lee said. "Any decisive 'soft landing' data will shift positioning far more dramatically."
Recent data suggests a soft landing in the economy is still possible as inflation continues to moderate lower and the Federal Reserve looks more likely to institute a pause in interest rate hikes at its next FOMC meeting in June.
Economist Paul Krugman highlighted the potential for a soft landing in the economy earlier this week.
"The good news is that so far it seems as if we've been getting significant labor market cooling without a rise in unemployment," Krugman tweeted on Wednesday. "Soft landing hopes are still very much alive."