SPX Market Cap as a % of GDP
By Barry Ritholtz - January 22nd, 2010, 12:00PM
Tweet
Facebook
Reddit
Digg this!
Comments
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
January 22nd, 2010 at 1:08 pm
Has that chart been adjusted for the makeup of the NYSE; operating companies vs other listings?
January 22nd, 2010 at 1:18 pm
The story that chart tells is about the increasingly larger share of commerce that goes to large cap corporations. Wal-Mart, for example, has taken over a lot of business that small business owners formerly conducted – local grocers, record store owners, sporting goods shops, etc.
January 22nd, 2010 at 1:28 pm
No, it shows how index funds skew reality.
January 22nd, 2010 at 1:34 pm
Interesting: “The average of 1,021 months shown is 61.89%” Isn’t .618 an fibonacci number used by Elliot wavers, part of the Golden Ratio?
January 22nd, 2010 at 1:51 pm
So according to this (very nicely done as always) chart, March’s devilish low of the SPX was actually close to fair value for the index – in fact near the upper end of the pre-Greenspan-Bubble-era trendline – based on long-term trends. That sounds about right, although it does conflict with your “70% reflex snapback rally from the March lows was actually quite reasonable” hypothesis, Barry.
Then again, in the modern-day U.S. Ponzi Economy, what does “reasonable valuation” really mean, anyway? Such a quaint old-fashioned concept … that went out around the same time the archaic notion of “successful business models actual involve earnings” vanished from the investment landscape in the mid-to-late 90s.
January 22nd, 2010 at 3:05 pm
I am looking at the chart and I am thinking that over the past 30 years:
- the pace of growth of new public companies has been much higher than the pace of growth of the economy;
- the spread between the stock market’s volatility and the economy’s volatility has increased substantially due to rising leverage in the financial system;
- despite the humongous increase in money supply in the economy, inflation was relatively low due to increase in productivity.
It would be interesting to see a chart that compares the rise in nominal World GDP with the rise of the Derivatives market value. The latest data that I have is $60.1 trillion world GDP and $531 trillion derivatives market in 2008 (up from $106 trillion in 2002)
January 22nd, 2010 at 5:56 pm
I think I know the answer as to how this happened. When did the market start accepting charge offs (one time expenses or gains) as not to be included in the EPS, The non-GAAP? I know AA regularly does a barrage of one time charges. Eventually some stocks will show negative EPS but non-gaap in the positive. Do you really believe then that company is actually making money? The recent accounting is rather silly. I’ve always wondered when it will blow up.
January 23rd, 2010 at 9:41 am
A case can be made that the 61.89% line has been skewed upwards by recent bubbles and a more reasonable historic norm may be near 50%, particularly if we are entering a slow growth environment where future earnings growth will be subdued. Yikes!
January 23rd, 2010 at 10:26 pm
The chart fails to control for the percentage of profits obtained from overseas operations. Over the past decade the percentage of profits from overseas operations has grown significantly. Last time I checked the Bureau of Economic Analysis data it was approximately 25%. Stock prices will reflect overseas earnings, GDP will not if those earnings are not repatriated. Consequently, this chart is very misleading. I would expect the market cap of stocks to increase over time relative to GDP. Finally, a moving average would be more appropriate.
January 24th, 2010 at 7:18 am
Hey Steve,
You are indirectly commenting on Globalization, which of course is a two way street.
While the percentage of US Corporate profits coming from overseas has increased, so too has the percentage of overseas corporations profits coming from their US operations. Given our debtor nation status, it is a substantial percentage of economic activity.
So the question becomes, is this relevant? Do they cancel out?
I don’t know…
You raise a valid issue, but I do not see this as destroying the utility of this measure. This Chart has been an accurate reflection over time of whether US corporate capitalization (relative to GDP) is high or not. I don’t see that overseas source of some profits changes whether this is a fair data point or not.
It remains a valuation metric relative to overall economic activity of a country, not about where profits come from geographically.
January 25th, 2010 at 9:38 am
[...] sobering) chart on the historical relationship of stock market valuation to GDP: http://www.ritholtz.com/blog/2010/01/spx-market-cap-as-a-of-gdp/ At close Friday, 92 of the S&P 500 stocks had reported earnings; 78% of those [...]