Comments on: Nasdaq Capitalization as a % of GDP

By: DanielHess

DanielHess — Sun, 22 Nov 2009 03:42:26 +0000

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.

By: Stock market cap to GDP ratio warrants caution | TheTradingReport

Stock market cap to GDP ratio warrants caution | TheTradingReport — Sat, 21 Nov 2009 18:55:17 +0000

[...] 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 [...]

By: Top clicks this week on Abnormal Returns Abnormal Returns

Top clicks this week on Abnormal Returns Abnormal Returns — Sat, 21 Nov 2009 03:08:59 +0000

[...] When your cost of capital is 0% everything looks attractive. (Kid Dynamite also Big Picture) [...]

By: hmakansi

hmakansi — Fri, 20 Nov 2009 06:36:15 +0000

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)

By: advocatusdiaboli

advocatusdiaboli — Thu, 19 Nov 2009 22:51:22 +0000

@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.

By: michaeld

michaeld — Thu, 19 Nov 2009 21:30:07 +0000

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

By: put_seller

put_seller — Thu, 19 Nov 2009 19:00:26 +0000

This is good…What would be better is to see the market value of Gold as a % of GDP!

By: DL

DL — Thu, 19 Nov 2009 18:58:25 +0000

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.

By: JZumbrun

JZumbrun — Thu, 19 Nov 2009 18:37:05 +0000

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.

By: John

John — Thu, 19 Nov 2009 18:31:15 +0000

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.