Ron Griess of The Chart Store looks at the market relative to GDP:

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Category: Markets, Technical Analysis

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.

21 Responses to “Market Capitalization as a % of Nominal GDP”

  1. Long term says:

    We’ve been running above “average” cap for 20 years now…will we run below average for the 20 to come? If so, better make sure you are a young man if you are going with buy and hold.

  2. contrabandista13 says:

    I was just thinking about total market cap last night, however, not relative to nominal GDP…. I was thinking in terms of the stimulative response to QE… So far so good, however, higher aggregate values will require a dynamic nominal increase in stimulation (QE)…. How long can we keep this up….? And where will it take us….?

    Left to it’s own devices, I don’t think that these values are sustainable for a significant period of time….

    Best regards,

    Econolicious

  3. jaymaster says:

    Could the increase in the 90’s be attributed to an increase in foreign profits at US traded firms?

    I’m thinking increases in production and what have you that drive up GDP, would show up in other countries GDPs and not in the US. But in theory, profits from those activities should be priced into US traded multinational’s stock prices.

  4. DL says:

    I wonder what the chart will look like after we pile on another $20 Trillion in debt.

  5. Jake S. says:

    Along your lines, jaymaster, I am fairly sure that a historical comparison is not valid for this metric. There are many factors that could contribute to the rise of this ratio over the years beyond just an overvaluation of stocks. In other words, it is logical that the stock market would have a changing relationship to GDP. Some of the reason are as follows:

    a) If a publicly listed company starts doing business overseas, its contributions to U.S. GDP as a percent of its total value (which would be captured in its market cap) will decline. Clearly many more U.S. companies do business overseas today compared with 20+ years ago.
    b) Private companies contribute to GDP but not to market cap. Over the years the IPO has become a more popular option for leading private companies – in the early 20th century, there was a larger number of significant private companies.
    c) Many companies contribute significantly to market cap before making even a slight contribution to GDP (hello internet stock bubble).

    My point is that I am not sure this should be looked at as an argument for the bears…

  6. machinehead says:

    It’s probably not a major distortion, since the NYSE has always snagged most of the large caps — but the Nasdaq and Amex were around for decades before 1985. So the chart peaks in 1929, 1937 and 1968 are likely low by 10 percent or so.

    Valuation has nothing to do with timing. But if you’ll reach for your bottle of Wite-Out and paint over the chart from 1997 to 2008, what you’ll see is a scary level of valuation today which — absent the ‘sequential Bubble’ years — is the craziest in history.

    Let me just state it again for the historical record. This is Bensane Bernanke’s Bubble III — right here, right now. The agony we’ll suffer in the next interminable, teeth-smashing recession is directly proportional to the excessive, zero-interest-rate fueled Bubble pictured in this chart. Wall Street’s Bubble gains are our future pain.

    And the Federal Reserve’s QE2 monetary merry-go-round keeps spinning, as Airman Ben plays ‘Ain’t No Stopping Us Now’ on the calliope. Step right up, folks — this way to the egress!

  7. lippard says:

    I second Jake S, and further add that I’d love to see an explanation of what the quotient of market cap and GDP even means. Isn’t this a bit like plotting a person’s wealth as a percentage of their extended family’s annual income?

  8. cognos says:

    ADRs.

    This is moronic.

  9. zell says:

    First came Greenspan in reversing the 1987 crash, then performing the same Fed.magic after the S&l mess. Then Nafta and the Republican takeover of Congress and deregulation got wind in its sails. There were the serial financial rescues of the 90′s starting with Mexico. Then the wonders of tech. which weakened the value of labor, at the same time bewitching the market. Greenspan always ready to over stimulate with Bernanke as a cheer leader and the multiple frauds of the housing bubble.
    G.D.P. has been hyped by debt, it’s not reliable… I can’t help but thinking and feeling like the economy has been hit with a stuxnet worm of sorts – home grown- which is acting on our economy like it did on the Iranian centrifuges- causing rapid changes till it all spins apart. There is great instability in that graph which is the real message.

  10. JR11 says:

    “Warren Buffett on the Stock Market” Fortune Dec 2001:

    “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%. “

  11. nofoulsontheplayground says:

    From an e-wave perspective, there are two bearish and one bullish read on that chart.

    A. Bullish Read – A 3-wave corretive move out of the March 2000 highs completed at the March 2009 lows.

    B. Bearish Read #1 – An a-b-c-d-e correction is unfolding off the 2000 highs, with the “d” up in progess and the “e” down to new lows due up next.

    C. Bearish Read #2 – The move from the 2000 highs to the 2002 lows was an “A” down, the move from the 2002 lows to the 2007 highs the “a of B”, the move down into the 2009 lows the “b of B”, and the move up from the 2009 lows the “c of B.”

    That would leave us with a “C” down still coming, a brother move to the move down out of the 2000 highs into the 2002 lows.

    Personally, I’m in the Bearish Read #1 camp, with the move up finishing this year and the final move down into late 2012 or early 2013. We’ll see.

  12. jaymaster says:

    Oh yeah, ADRs, private companies, etc. are other good points.

    That one QOTD that pops up here from time to time comes to mind: “Torture the data long enough, and it will tell you anything you want to hear.”

    This might be a Rorschach Chart.

  13. Elizabeth says:

    Excellent site with market cap as % of GDP updated daily:

    http://www.gurufocus.com/stock-market-valuations.php

  14. Jake S. says:

    @jaymaster:

    It may not be a case of torturting the data so much as it is one of selecting the wrong data. I think if you’re going to act based on a “stock valuations measured by their multiple of ____’ outlook, you had better choose your ‘____’ carefully.

  15. machinehead says:

    Sure, there could be secular changes in the market cap to GDP ratio. But its message of overvaluation is confirmed in the high Q-ratio (which is not subject to distortion from ADRs) and from high earnings multiples (Shiller’s 10-year average; Hussman’s normalization; etc.)

    At these nosebleed valuations, stocks will struggle to deliver low single-digit total returns over the next decade. And they’ll do it with considerable volatility, making for unattractive risk-adjusted returns.

    All the rest is just the standard bullish rationalization fueled by self-validating momentum mania.

  16. DeDude says:

    Is there any logic or rationale to suggest that these ratios should remain constant as we move from a 1924 economy to a 2010 economy? What makes a big GDP now and then, and what determined values of companies now and then?

  17. Liminal Hack says:

    “Sure, there could be secular changes in the market cap to GDP ratio. ”

    Of course. I would say that is exactly what we have here. Not to say it won’t head down again for some while.

    Some reasons to posit a secular change that remains stable:

    1) In the period 1800-1945, nominal short term interest rates are very stable at about 5%. I would say that is the outcome of the gold standard. But there is no price stability, with real rates swinging about zero with quite high frequency. One long term possibility then, post gold standard is that short term nominal rates are very stable near 0, and real rates swing about with high frequency. Same as the last period, but different nominal set point.

    2) QE can potentially maintain a peak debt equilibrium, albeit with some oscillation. Those who think QE automatically leads to hyperinflation in the end may well be wrong, because they forget that QE is not in fact unbacked emission of currency, it is backed by the highest private debt levels ever seen.

    3) There is no reason, with deep and highly integrated markets why stock yields should be any greater than the yields on similarly risky or liquid assets. Possibly, no matter what happens to valuations, wages, asset price etc, reasonably liquid assets of all kinds will always achieve a price at which their yield is as close to zero as their actual risk premia allow them to be.

  18. drewburn says:

    Inclusion of the NASDAQ ( from ’85) could be a major distortion. I’d also like to see inflation corrected and logrythmic version.

  19. [...] Market cap relative to GDP – [...]

  20. Thatguy says:

    Drewburn,

    Is that like a reflexive muscle twitch (“I’d like to see inflation corrections and log scale”)?
    The chart is a ratio of market cap to GDP which are both nominal so you’ll nd up with the same chart if you compare real GDP to real market cap. Additionally, what’s being charted are percentages, so a log scale doesn’t make any sense. I understand that a log scale is helpful for looking at price action, but they don’t work well with percentages.

  21. HammerMadDog says:

    There are $1 trillion+ of ETF’s (plus numerous closed end funds) now trading on the exchanges. There could be some meaningful double counting issues in this analysis.