Margin Credit and Stock Return Predictability

Margin capacity, defined as the aggregate excess debt capacity of investors buying securities on margin, strongly predicts (a) lower S&P 500 returns, (b) lower growth in aggregate earnings, dividends, employment, and overall economic activity, (c) higher macro, financial, and policy uncertainty, (d) lower interest rates, (e) tighter lending standards by banks, and (f) lower intermediary equity capital. High margin capacity is a precursor, not a...