We haven’t run this chart in a few weeks, so lets revisit this now: As of April 2010, the NYSE (~$13T) and the Nasdaq (~$3.6T) total $16.6T versus March US GDP of $14.6T for a total cap of 113% GDP:

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Category: Economy, Markets, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Market Cap as a % of GDP”

  1. wally says:

    Since 1998: lower highs and lower lows?

  2. colin says:

    Probably worth looking at global GDP too, right? Companies like Coke are selling 80% of their product overseas.

  3. The Ghost of Y2K says:

    Market cap to GDP divided by listed company’s contribution to GDP is the only way to do this properly, I’m sure publicly listed companies in 1929 contributed far less a percent of US gdp than they do now.

  4. destor23 says:

    So it hasn’t been below its average since the early 90s? That’s kind of a long time though. Are we making a new average or in for a collapse?

  5. DL says:

    It seems to me that in considering a chart like this, one should also be contemplating a chart that illustrates the increasing debt-to-GDP ratio over time. Surely some of that government spending is winding up in the stock market, and in corporate earnings.

  6. nickthap says:

    What is the significance of the market being overcapitalized? Does this mean that the indexes are too high and should/will drop? Is this a correction?

  7. Mike S says:

    DL,

    Look up the Kalecki profits equation.

  8. R. Cain says:

    with due respect, this chart has zero utility
    and, by its simplistic nature, is a theft of time

    there are MANY variables which have not been accounted for:

    • the inflation in P/E ratios
    • 80 years ago, the listed corporations were American, with domestic output
    today, the majors are non-national, with GLOBAL output
    • the list could easily be extended

    a more accurate – although equally useless – chart would show market cap as % of NON-govt GDP, given govt/GDP has risen from 10% in 1920 to more than 40% today

    imo: chart FAIL

    US govt spending as % GDP 1903-2010
    http://www.usgovernmentspending.com/downchart_gs.php?year=1903_2010&view=1&expand=&units=p&fy=fy11&chart=F0-total&bar=0&stack=1&size=l&title=US%20Government%20Spending%20As%20Percent%20Of%20GDP&state=US&color=c&local=s

  9. PhilB says:

    Barry: If you are reading this…you’ve been too quiet!

    Are you retrenching and waiting to see which side of the fence you will come down on?
    Needless to say the immediate issues and markets nerves are far more compelling and in need of interpretation right now than any graph…

    So, Barry, still bunkered down in cash? Leaning any particular way? Are we at the mercy of the hands of the euro governments and their plans and execution? Bank bailout coming for Europe to quell the rising LIBOR rates? Another Panic selling leg down to test the 200 moving averages for good measure?

    While we all are wading out at sea…care to drop a pearl or two of insight/wisdom our way…?

  10. cognos says:

    Barry was busy… buying the dip.

  11. DL says:

    Mike S @ 2:58

    Thanks for the response;

    http://en.wikipedia.org/wiki/Micha%C5%82_Kalecki

    although I’m not clear as to what role you think federal debt should play in the analysis.

    I do think that we’ll eventually get reversion to the mean, insofar as the market cap-to-GDP ratio is concerned, but whether it takes 2 years or 20 years, I don’t know.

    And I suppose also that, one way or another, the debt-to-GDP ratio will eventually come down, whether by currency devaluation, or default, or some other means.

  12. boratsagdiyev says:

    More and more companies have gone public over the past several decades, therefore this chart is useless in determining whether the stock market is overvalued.

    Q ratio and cyclically adjusted p/e are more helpful, and they indicate the market is 50% overvalued.

    I think Barry posts this chart in order to spread fear.

  13. JamesR says:

    Warren Buffett, sez (‘Warren Buffett on the Stock Market’, Dec 10, 2001, Fortune mag, by Carol Loomis):

    “On a macro basis, quantification doesn’t have to be complicated at all. Below is a
    chart, starting almost 80 years ago and really quite fundamental in what it says.
    The chart shows the market value of all publicly traded securities as a percentage
    of the country’s business–that is, as a percentage of GNP. The ratio has certain
    limitations in telling you what you need to know. Still, it is probably the best single
    measure of where valuations stand at any given moment. And as you can see,
    nearly two years ago the ratio rose to an unprecedented level. That should have
    been a very strong warning signal.

    … For me, the message of that chart is this: If the percentage relationship falls to the
    70% or 80% area, buying stocks is likely to work very well for you. If the ratio
    approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire.
    As you can see, the ratio was recently 133%.

    Even so, that is a good-sized drop from when I was talking
    about the market in 1999. I ventured then that the
    American public should expect equity returns over
    the next decade or two (with dividends included and 2%
    inflation assumed) of perhaps 7%. That was a
    gross figure, not counting frictional costs, such as
    commissions and fees. Net, I thought returns might be 6%.

    Today stock market “hamburgers,” so to speak,
    are cheaper. The country’s economy has grown and
    stocks are lower, which means that investors are getting more for their money. I
    would expect now to see long-term returns run somewhat higher, in the
    neighborhood of 7% after costs. Not bad at all–that is, unless you’re still deriving
    your expectations from the 1990s.”

    http://www.latrobefinancialmanagement.com/Research/Individuals/Buffet%20Warren/Warren%20Buffett%20on%20the%20Stock%20Market%202001.pdf

  14. alfred e says:

    Interesting. Things I noted.

    Fewer and fewer larger companies account for more of the market cap. And that’s an important statement of the trend. In and of itself.

    TBTF accounts for far too much of the market cap.

    We almost got to the point where the market was in touch with reality, but now the market is headed in the wrong direction again.

    Oh, so I suppose some J6Ps are falling all over themselves to jump back into the shark infested waters?

    This chart accurately suggests no.

    And I think that’s the point.

    Especially when you consider the government intervention in GDP to the upside.

    Which is a prime factor.

    Gee Dad, when exactly did the world think less of Greece than the US?

  15. Nick Abe says:

    I had to post in this thread, and agree with what most people have been saying: this chart is stupid.

    There is nowhere near enough data contained in this chart to draw any inferences at all, and the implication that the chart’s creator is trying to make (that we are 2x the “average” market cap to GDP, and therefore due for a correction) is asinine.

    Here’s how the chart should be fixed.
    1. Adjust GDP to be total revenue of all listed companies (note: this would include revenues outside of the US). If you still wanted to use US GDP as some kind of proxy, then include some adjustments for non public company contribution to GDP and adjustments for public company foreign revenue.
    2. Profit margins need to be added.
    3. Interest rates should be added.

    Then you would have the basics of a USEFUL chart. You could argue that the 60% the chart shows in the 80s versus the 113% today could be totally explained with just interest rate adjustments (i.e. P/E should go up in permanent low interest rate environments) and we may in fact be UNDERvaluing the market here.

  16. kaleberg says:

    You’ll notice that high market capitalization is associated with slow wage growth. Basically, money that could have been invested and used to improve living standards has gone into the stock market. According to the New York Stock Exchange, less than a dollar in a thousand spent on “investments” goes to improving our productive capacity, so “investing” has been nothing but a drain on our society.

  17. constantnormal says:

    I treat “market cap” as nothing more than an indication of the size of the pile of chips in the stock market roulette table. That said (only to establish my perspective, not an attempt to persuade others to adopt it), the history texts tell us that back in the late 1920s, 10% margin requirements lead pretty much every man/woman/family pet to be up to their eyeballs in leveraged debt, all plunked onto the Wall Street roulette table.

    But this … is really sumptin’ else, and fills me with appreciation for the amount of pumpin’ of credit into the markets that Easy Al managed during his tenure, which seems to have found its way into the stock markets, after the commodities and real estate bubbles have popped. Or maybe this is where all the money that was made in the housing business, selling bum mortgages several times over, has finally settled. It’s a wonder that the roulette table doesn’t collapse under the weight of all those chips.

    Who knew that a dismal future with soaring taxes and failing debt issues everywhere could spark such investment interest? I guess when it’s the only game in town, ya gotta join the party, and while the music is playin’ ya gots ta gets up and dance!

    When the final bubble gives way, it’s gonna be a whole new chapter in the history books.

    ~~~

    BR: This is capitalization as a proxy for size (not value)

  18. Bruman says:

    Barry, it would help to have the total revenues of the companies as a % of GDP on this chart to get a sense of how the increase in publicly traded companies over time is affecting this. Because market cap includes the PV of future growth and GDP doesn’t, I’m not really sure these series’ are as comparable as they would seem. The high values of equities may represent the expected future growth because of technology, globalization, etc.. If those benefits are running out because labor arbitrage and consumer arbitrage is becoming exhausted and because technological improvements are now more or less incorporated into business processes, we may indeed see a mean reversion process occurring; but if additional globalization and technological advancement is reasonable to assume, it could stay high.

  19. Pieter says:

    Is there a chart indicating the total earnings as a percentage of total market capitalization of all public companies over the past 80 years? (This will not be the same as P/E ratios which does not give a weighting to company market cap.)