Jamie Dimon oversees the largest bank in the U.S., serving as CEO and Chairman of JPMorgan Chase for the last 20 years. That gives him a front row seat to the financial markets, and he's never been shy about sharing what he sees with the investment community at large. When he has something to say, it's worth paying attention to.
Dimon recently shared some insights about the current market environment that should give investors pause. With valuations for the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) stretched, Dimon shared a warning that the market is in a precarious position. This Rare Signal Is Flashing Again.
In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue » These nine words explain the added risk in today's stock market.
In a recent interview, Dimon explained that margin debt is at its highest level ever. Indeed, margin balances topped $1.5 trillion in June, the highest on record and up 49% year over year. It's important to note, however, that, as a percentage of the S&P 500 market cap, margin debt is around average.
That's why Dimon's warning is so pertinent. "There's a lot of margin debt you don't see," he said. He noted prime brokerage debt, hedge funds, Treasury arbitrage, and leveraged ETFs as examples of debt that won't show up in the numbers reported by FINRA each month.
"So market leverage is pretty high." Dimon noted that when leverage increases, you have a higher chance that something will disrupt the market and lead to a significant downturn. While leverage has allowed stock prices to climb higher quickly, it could also lead to rapid drops in the market. A drop in prices could create a cascading effect, leading to forced selling, pushing prices even lower, and resulting in more forced selling in a vicious cycle.
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