Nasdaq Capitalization as a % of GDP
By Barry Ritholtz - November 19th, 2009, 11:30AM
Compared to historical norms, Nasdaq market capitalization is significantly above median levels relative to GDP.
The Nasdaq’s median percentage of GDP has averaged 61.8%; its now over 100%. As the chart below shows, the big aberrational periods have been due Fed bubble inflation: first in 1998-2000; then more recently in 2006-07.
The present Zero Interest Rate policy (ZIRP) is helping to inflate a 3rd market bubble:
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Chart courtesy of Ron Griess of The Chart Store.
November 19th, 2009 at 11:42 am
All indications of forever blowing bubbles.
November 19th, 2009 at 11:43 am
just buy some tech stock already-
it won’t go down- ever-
the geniuses out there know this
November 19th, 2009 at 11:46 am
Have to say that I don’t find this a particularly useful relationship to chart.
The NASDAQ is an invention modified at will, prone to following equity fashions, and driven in part by competition amongst index products.
The real world set of enterprises that make up the index therefore have no consistent relationship to the economy as a whole. It follows for me that I shouldn’t expect the capitalization of those enterprises to have some norm versus the overall economy.
November 19th, 2009 at 11:58 am
No surprise here. Fed wants another round of asset bubbles (Peter Boockvar / today’s Tech Ticker):
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“When you cut rates to nothing you’re encouraging people to take risk,” Boockvar says. “As long as asset inflation is [the Fed's] goal, the market could go higher but there are obvious consequences,” including inflation, as discussed here.
The Fed is trying to create “the illusion of prosperity” by fueling asset price appreciation, Boockvar says, staying true to his reputation as a deficit hawk. Even if the U.S. stock market keeps rallying, “non-dollar assets” like commodities and emerging markets will continue to outperform, he says.
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The Fed is not addressing deleveraging by the private sector, and ignoring the huge, and growing national debt, which is much greater now vs. the Great Depression. Demand is hugely reduced in a consumer-driven economy in deleveraging mode. Add to this the growing cost of servicing the debt, and the result is no growth. Next year should be telling.
Fed cannot create demand in any meaningful way. We will have a worse scenario next year when the stimulus runs out, and no significant jobs created. This is not a post-war recession, but rather a credit contraction recession. Because the debt levels are now so high vs. GD I, the Fed’s actions will not be effective. We all know that asset bubbles pop, and so how are the current Fed actions anything more that short-term anyway? Need some real economists here.
End the Fed. Support HR1207. Watt’s amendment is co-sponsored by the Fed, it would seem. Need “change” – promised, but not delivered, yet.
November 19th, 2009 at 12:10 pm
A question: what percentage of the companies in the Nasdaq have an international market, where the world aggregate GDP means more than the U.S. GDP?
November 19th, 2009 at 12:39 pm
OK….and this is based on a GDP that is about 12% OVER VALUED thanks to pulled forward demand. If we took the over-valued part of GDP out of the equation…how high would the relationship be????
This is going to end BAD, really bad. Whether we like it or not the GDP will correct. Either the hard way…quickly, or NO GROWTH over a very long period of time.
November 19th, 2009 at 12:51 pm
[...] When your cost of capital is 0% everything looks attractive. (Kid Dynamite also Big Picture) [...]
November 19th, 2009 at 1:31 pm
Barry,
The chart indicates market capitalization of NYSE plus NASDAQ, yet your headline and text indicates market capitalization of NASDAQ.
The calculation of the long term average is higher as a result of the recent stock market bubbles. So the long term average that is reflective of the true value of stocks is actually lower, thus exacerbating the abberations. Of course, if we are to be in a period of bubble after bubble after bubble, then it’s very difficult to identify what is true, whether that is the stock market or GDP.
November 19th, 2009 at 1:37 pm
I’d be interested to see what portion of that is NASDAQ and what NYSE. Would you not expect NASDAQ market capitalization to increase even as a share of GDP as technology develops? We clearly have a more tech-centric economy than in 1927. I’m not sure why one would expect the NASDAQ in 2009 to revert to its median price over the last 85 years.
November 19th, 2009 at 1:58 pm
The fact that companies within the Nasdaq 100 have become increasingly important to the U.S. economy over the last 20 years does not, in and of itself, mean that the Nasdaq is a bubble.
November 19th, 2009 at 2:00 pm
This is good…What would be better is to see the market value of Gold as a % of GDP!
November 19th, 2009 at 4:30 pm
NASDAQ stocks appear to be ahead of themselves currently. It is best to use timning signals to figure out when to get in and when to get out.
Example: There was a big move down today in the stock market.
But there was a way to make money from this move, if only your DJIA index timing signal told you TWO DAYS AGO that the market is in correction mode.
admin
http://invetrics.com
November 19th, 2009 at 5:51 pm
@DL: “The fact that companies within the Nasdaq 100 have become increasingly important to the U.S. economy over the last 20 years does not, in and of itself, mean that the Nasdaq is a bubble.”
Two problems: one, before high tech there were cutting edge manufacturing firms that held that lofty economic position similar to the NASDAQ “high-tech” position today so the chart is still valid and two, you are ignoring that fact that the NASDAQ firms’ economic activity is counted in the GDP as well as in the market cap–so your argument is specious and the chart maintains its value in my view. What has changed how investors value equities–bubbles appear to be more acceptable but so then will be jaw-dropping corrections.
November 20th, 2009 at 1:36 am
It’s interesting but the upshot is that this will never be the trigger to cause a market reaction. Valuing any asset in an environment of zero interest rates is impossible, even in the absence of negative profit/CF growth. Note Solow’s humble but simple valuation formula. CF/(r-g)
November 20th, 2009 at 10:08 pm
[...] When your cost of capital is 0% everything looks attractive. (Kid Dynamite also Big Picture) [...]
November 21st, 2009 at 1:55 pm
[...] Ritholtz at The Big Picture blog posts an interesting – and scary – chart showing total stock market capitalization in the United States versus U.S. GDP. (At least I think that’s [...]
November 21st, 2009 at 10:42 pm
Total bunk!! Barry, use your head!
Why is NASDAQ market cap / nominal GDP a legitimate valuation tool?
Where everything falls apart is that economic output does not have happen inside of public companies. Enormous portions of the economy can be outside of the realm of public companies, from small business, to private companies to private equity to partnerships to government, universities and organizations of all types.
This metric would only work if the proportion of GDP that occurs within public companies were constant over many decades. There is no basis for such an assumption. What if a bunch of companies were to go private? Or public? That would change this ratio dramatically but not necessarily mean anything for valuations.
Some economies (such as in developing countries and the US generations ago) have much less of their economies under the umbrella of public companies. That doesn’t tell us anything about whether they are overvalued or undervalued.