US Stock market capitalization (NYSE + Nasdaq) is now larger than US GDP.
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Chart courtesy of The Chart Store
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.
Q: Why do Economists provide estimates of inflation to the nearest tenth of a percent? A: To prove they have a sense of humour.
"The Greek offer is not sufficient and they have to go away to come up with a revised plan," said a spokesman for the German Finance Ministry. The Greeks must first have a plan that satisfies the Germans which this comment states they clearly don't yet and then the Greek Parliament will vote on it this weekend. This said, whatever package gets voted on in Greece is basically an up or down vote on euro membership so we are entering another uncertain weekend for global markets. A failed vote will likely lead to a hard default which may be what...
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July 23rd, 2010 at 12:32 pm
Is this because of the increase in globalization and many multnationals are “stealing’ others GDP …so maybe the historical trend line is still valid????? ….just a thought that may or not be correct.
July 23rd, 2010 at 12:49 pm
To what extent are ADRs factored into this? Also, U.S. multinationals derive a significant amount of revenue from outside the U.S.; shouldn’t that affect the usefulness of this particular metric?
July 23rd, 2010 at 12:50 pm
I hear that Lawrence Welk bubble machine music …
July 23rd, 2010 at 12:59 pm
Makes sense. US firms don’t only sell in the US.
July 23rd, 2010 at 1:03 pm
“Makes sense. US firms don’t only sell in the US.”
But those sales (exports) are part of GDP too.
July 23rd, 2010 at 1:15 pm
@jrm — except that GDP includes exports. OK, net exports, which might account for the difference.
It would be interesting to see the same chart for German equities vs their GDP.
A little googling results in German GDP (2009) of about $3.3T, and the (2009) market cap of the Frankfurt exchange at around $1.292T, yielding a ratio of about 39%.
I don’t believe that exports can explain this. Ridiculous valuations? Perhaps.
http://www.wikinvest.com/wiki/List_of_Stock_Exchanges#The_World.27s_Top_15_Stock_Exchanges_by_Domestic_Market_Capitalization_in_2009
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
July 23rd, 2010 at 1:18 pm
What a silly chart. As more companies go public, then the line trends upwards. Thus the chart does not distinguish the same companies getting bigger vs simply more companies being added to the NYSE and NASDAQ lists. The chart also doesn’t distinguish a company growing by improving and selling more product vs buying a non-public company that sells different products.
The chart means nothing.
July 23rd, 2010 at 1:23 pm
Remember that market cap is only the size of the pile of chips at the Wall Street roulette table. It has nothing to do with the “size” of the companies, only the amounts of money “invested” in them.
Given the dearth of alternatives to the stock market that promise (at least to the hopeful) significant returns (and you have to admit that, thus far, the stock market has delivered in the ROI area since March 2009), it might just be that all of the money — or at least an outsized portion of it — has found its way to the Wall Street equities roulette table.
Certainly nobody is pouring billions into real estate these days, and commodities are not drawing a lot of interest in the face of deflation, and for yield-oriented investors, bonds simply suck (I am aware that there are those who are more concerned with the return of their principal than the returns on their principal). So maybe equities win by default — at least for the time being. And looking back over the past 20+ years, what has been the driving force in the financial world? Easy money. So maybe it is just a case of too much money with no place to go.
July 23rd, 2010 at 1:26 pm
Large publicly owned companies (Walmart, Home Depot, etc) have replaced the small privately owned businesses of fifty years ago. You would expect some increase because of the the shift from private to public ownership.
Warren Buffett, in Carol Loomis’s December 2001 Fortune article: “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%.”
July 23rd, 2010 at 1:26 pm
@Marc P
So not a lot of companies went public between 1928 and 1992? Or somehow the number of companies that went public over that interval magically approximately matched the growth in GDP?
What changed in 1992? Let’s see… Greenspan became Fed chairman in 1987 …
July 23rd, 2010 at 1:58 pm
This chart has no relevance in and of itself, without data showing the percentage of GDP contibuted by publicly listed companies.
If that percentage has increased over the same time period (and I suspect it has), then the public market cap/GDP SHOULD be increasing.
July 23rd, 2010 at 2:05 pm
I wonder how this is tied in with the stagnation of worker pay as well. If worker pay (and other outlays like dividends) stay the same, and company profits increase, company value increases. That seems way too simplistic, though. There’s also the casino argument, that the market cap is the number of chips put down rather than the fair value, but then you have to believe that the US stock market is long-term irrational, and I’m not ready to do that yet.
July 23rd, 2010 at 2:29 pm
It would be intersting to chart P/E ratio on this.
July 23rd, 2010 at 2:37 pm
Market Cap is a manifestation of P/E ratios, a purely psychological phenomenon and the primary cause of bull and bear markets as people are willing to pay more (or less) for earnings. To make more of it is of questionable value.
July 23rd, 2010 at 3:41 pm
@ constantnormal:
Who knows? It would take a week to adjust for all the crap to turn this chart into something meaningful.
@ ACS:
A great example of another adjustment that the chart-happy creator of this mess didn’t think about.
July 23rd, 2010 at 7:51 pm
A lot of people like this metric, and it is good for comparisons over shorter periods (like one or two decades) but it fails for comparison over longer periods (like between now and the 1920′s), because of various factors that can vary over time::
1) Percentage of US businesses that are public (and thus part of market cap) versus private.
2) Percentage of GDP contributed by US businesses (whether private or public) as opposed to foreign businesses operating in the US.
3) Percentage of profits of US public corporations that derive from US operations (and are thus part of US GDP) versus foreign operations (and thus part of another country’s GDP) can vary over long periods.
4) Aggregate debt/equity ratios can vary even over fairly short periods (like a decade), due to trends for leveraging and deleveraging, where there is a certain amount of herd mentality so that all the managers follow the trend. During a period of leveraging, market cap may shrink simply because all the managers have borrowed and bought back most of the stock, and vice-versa for deleveraging periods.
My impression is that factor 1 would tend to bias the ratio upwards over time, that factors 2 and 3 tend to largely offset one another, and that factor 4 is not very significant.
I used this metric together as a sanity check against Shillers 10-year averaged PE, just to make sure the latter hasn’t been distorted somehow by fake earnings reports. My other two sanity check metrics are corporate profits as a percent of GDP and Tobin’s Q ratio against its average, as charted by Andrew Smithers (http://www.smithers.co.uk). All of these metrics show stocks to be somewhat on the pricey side.
July 23rd, 2010 at 9:21 pm
That’s ok – our derivatives market has a market cap larger than GDP of the entire world, mars*, and whatever planet that UFO that was hoovering over China a couple of weeks ago (man, that faded quick).
*in martian pesos, adjusted for inflation and time travel
July 24th, 2010 at 8:07 am
Clearly I was tired since this sentence “whatever planet that UFO that was hoovering over China a couple of weeks ago” is a: a grammatically incorrect fragment and b: refers to earth itself. What I meant to say of course was whatever planet that UFO that was hoovering over China a couple of weeks ago was FROM.
But no worries – nobody made it that far down the comments to notice, just like this!
hahaha – enjoy your saturday folks! Serving up 99 degrees in NYC…
July 24th, 2010 at 10:26 pm
I believe that constantnormal is right on the money. We are having what I call a bear rally. There is no place to invest one’s money, so we put it in the market, so the market goes up. The market did great during the big recession in the early 90s for just this reason. There was a hilarious op-ed in the times which followed every bit of bad news with some complex reasoning and ending each with “… and that’s good for stocks.” There was lots of bad economic news and most of the reasoning was full of holes, but it was hilarious. The real reason the market was going up was that the market was going up.
Anyone who estimates market capitalization by multiplying shares outstanding by their current trading price is making a big mistake. Sure, a small investor can trade at the margin and liquidate at the prevailing price, but if you plan to sell the entire company, you will find yourself moving along the demand curve and influencing the price as you sell. The integral under that curve is generally much smaller than any estimated product. When incomes aren’t keeping up with productivity leading to a shortage of investment opportunities, marginal stock prices often soar, but the value integrals may actually be sinking.