Earlier this week, we looked at the impact the financials had on the S&P. Today, I want to bring two charts to your attention that might give you some pause.

The first is from Ron Griess (The Chart Store), showing NYSE market cap as a percentage of GDP. It indirectly relates  stock prices and valuation to 0verall US economic activity. This acts as a ratio: How active are bankers, speculators, traders, etc. relative to other activity?

A more direct version comes from John Roque of WJB Capital. John took the market capitalization of the Financials versus the SPX cap. You can readily see how far above the median we have been since the mid-1990s. (I can only partially blame Alan Greenspan’s easy money for this).

Combine these two charts, and you get a sense of what happens  when Finance is dominant versus other sectors.

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NYSE Market Cap vs Nominal GDP

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Financial market cap as a Percentage of S&P500

Category: Economy, Markets, Quantitative, Technical Analysis, 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.

11 Responses to “Financials as Percentage of S&P500 Market Cap”

  1. Chief Tomahawk says:

    Shoulder to a header to a shoulder = Acapulco cliff dive?

  2. cjcpa says:

    Barry,
    This chart, and divergence from trend has come up a few times. Market cap as a percentage of GDP.

    But as housing prices soar way above trend, we expect them to come back.

    So I have a big question for the BigPicture:
    Is it possible that the market cap to GDP graph really reflects the rise of multinational corporations. Or the fact that Apple (e.g.) is traded in the USA but most of the work is done in China? I don’t have the numbers, but would the concept that in the 30′s and 40′s there was no outsourcing/offshoring, etc. explain the differenc? So what the graph really shows is (assuming the market cap is based on a P/E that is somewhat correct) that companies are making more and more of their revenue overseas, and although traded on a USA stock exchange, a lot of the economic activity doesn’t happen *here* anymore. So it’s not part of OUR GDP.

    ??
    I wonder.

  3. socaljoe says:

    I wonder what this chart would look like if the big banks had not been bailed out.

  4. [...] Financial market cap as a percentage of the S&P 500.  (John Rogue via Big Picture) [...]

  5. nofoulsontheplayground says:

    Barry, I don’t like to use H&S top targets when they point to near zero or below zero as this one does. However, if you treat it like a “mirror” pattern by drawing a vertical line around Sept. 2004, you’ll see the right side repeating the pattern on the left side.

    This “mirror” pattern has a regression that suggests the financials will hit the 8-10 area around 2014 or so and eventually settle around the 6 area in the 2017-2018 time frame.

    Eventually these patterns stop working, but they are one of the more helpful patterns I’ve found over the years for predicting both time and price.

  6. Sam125 says:

    The second chart is interesting but misleading. Since the vertical is a percentage of the financials market cap vs the SP500 it doesn’t really indicate the price if anything as there are still several other factors in play here such as the overall robustness of the sector vs the overall health of the S&P. Since it’s become pretty apparent that other non financials are replacing former financial bellweathers of the S&P then yeah of course the sector is seemingly in decline. Still, something to look out for when investing.

  7. Ted Kavadas says:

    Interesting charts. I have found the Market Cap as a % of GDP metric to be particularly noteworthy and IMHO it deserves frequent monitoring.

    Over the years, I have found that when the financials lag – especially in pronounced fashion – it is a cautionary sign.

  8. kwabena says:

    cjcpa has a good point. In the sense that GDP is a good metric against which to measure market cap, aren’t you essentially using GDP as a proxy for “earnings” ? And yet, the Shiller 10-year average P/E graph shows valuation (although high) remaining roughly within the same historical range as the 1920-1950 and 1950-1980 cycles…

    It seems that either:
    – NYSE listed companies include earnings that aren’t part of US GDP
    or
    – earnings became DRASTICALLY overstated starting around 1993

    And it seems a bit much to blame the shift solely on the second effect…

    And further – if that’s the case (that there’s a good reason that US GDP is no longer as relevant a comparison), then it seems it might be fairer to post such a chart with a disclaimer. (And if not, then perhaps Dr. Shiller should post his data with a disclaimer)

    (No offense intended – I don’t always agree with you in everything, but I always love reading your stuff!)

  9. Ernesto says:

    There are couple of points here to remember for the bears:

    1) Why arent we lower already? Folks its been 3 weeks since the bottom fell out of commodities starting with silver. EM equities have all had a correction of 10-20% since Goldman famously said sell Chinese equities in November (amazing how that works, they said sell commodities too, and crack..). Now oddly enough, Goldman is bullish Chinese equities and commodities again…go figure (anyone still wonder why they get perfect trading records?)

    2) Team Ben Bernank/Obama: I dont think we have ever seen a more historical occassion as when the FED actually states that they are targeting equity prices. Its on the record. That must mean we have a floor. Where is it? good question but i doubt it will be 1040 again. They cant wait that long else the market wont bet with them again. Also, we are in the legendary year 3 of Obama. The guns have been drawn and fired (tax breaks 800B, QE2 600B), with all these chips on the table i just cant imagine they are gonna let the floor drop out from the market. When you have the FED and the President committed to Vegas or bust mentality, there will be more assets to throw onto the table when they find themselves short-stacked.

    3) The market IS resilient, maybe too much. This could cut both ways..market has weathered The PIG problems, MENA (Middle East North Africa) rolling revolutions, Japans nuclear implosion, commodities bust (with help from the CME on the trading limits for oil and the margins for silver), and an EM equity correction (none have gone from high to recent low beyond the usual definition 15-20% correction). Market has dealt with input cost inflation and consumption inflation. It is really a death defying feat.

    So, in my view, the pedal is still to the metal, and a US equity market correction is not in the cards yet, not because it doesnt “deserve a break today” at the least…but because if you guys all sold, hedge funds have sold and gone short, mom and pop are out, dedicated funds are holding, not selling..then who is going to puke their positions to the shorts? The market would really need to drop 10-20% (1225-1088) to force the selling as 5-8% wont do it. Folks, with talk of economic slowdown, that market correction would seal a recession in my view and destroy FEDs game plan and Obama’s chances.

    Its very high stakes game here, not just your ordinary market correction, i would say it would be a bear market if we had the text book definition come true.

  10. whalenc says:

    Thank you for this Barry. I try to explain to people why 50% of pre-crisis ROE, revs in banks is not going to get financials back to the “head” in the chart. I think there are a lot of potential victims on the long only camp among the larger funds that play in financials, even now. Lambs to the slaughter. The really amazing thing is that people even debate the return of QE. And by the time we reach year end, NIM will be in a free fall and Uncle Ben will still be printing money. Then what? Pay 5% on reserves to subsidize asset returns for the banks? I need to go fishing and start looking for the survival cave.

    Chris

  11. Greg0658 says:

    cjcpa at 12:28 I’m wondering along them lines myself .. and I worry how things go when stuff we need is manufactured over there and oil jumps parabolic .. starve or abandon capital* infrastucture in place ? .. “it’s not part of OUR GDP” .. slosh back via stock dividends ok I guess .. our trade deficit is not only cheap labor and oil as we are spoon fed the meme “hold on – currency revaluations are coming and all will be well” ya right

    .. and/but/or that other fact of education in business “hands on training” and in this world you only learn so much in school .. the real knowledge is in the trenches

    and we’ll see how our trenches of computers “slosh backing stock dividends” works as a real living wage

    *coda – my gut says thats where my pension at 55yo went .. moms & dads stop being that .. to many people not enough jobs .. damn robots and super ships

    pss – oh ya – hows that birth death ratio graph thingie going to react after today?