I always find these charts instructive in terms of where we are over the longer cycle in terms of valuation relative to economic activity of the US.

The two biggest changes post-1996 has been the increasing US exposure to overseas growth, and rates that started low went to ultra low.

Market Capitalization as % of GDP

click for larger charts


Market Cycles Above and Below Trend Line

Category: Cycles, 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.

10 Responses to “Market Capitalization (NYSE + Nasdaq) as %GDP”

  1. madgreek says:

    Looks like Hahnenkamm Kitzbühel getting ready for the downhill out of the starters gate.

  2. Woof says:

    Barry — how do you think about the relevance of this long-term trendline especially for the earlier periods? For example, the trendline used to measure the 213 months below from ~1937 to ~1954 is at least in part based on all the data from 1954 to 2011.

    Seems like if this trendline were drawn to early 2000 or even late 2007 it might be higher and higher enough that the periods below trend would be considerably longer and the ‘waffling’ periods much shorter.

    Is this just confirmation bias? I.e. we want to see relatively regular periods of performance and so when the chart looks that way, we talk about it. When it doesn’t, we talk about something else.

  3. [...] Market capitalization as a % of GDP.  (Big Picture) [...]

  4. constantnormal says:

    “The two biggest changes post-1996 has been the increasing US exposure to overseas growth, and rates that started low went to ultra low.”

    It certainly looks like “overseas growth” is coming to a halt, fer shure in Europe, likely in China (sooner or later), and maybe in Brasil, SEA, etc, when the consumption engines of Europe and Bananamerica fall prey to austerity …

    … and while I thought it would have happened by now, surely the Fed’s low-rates policy cannot be supported forever, not without severe consequences … either this zombie economy lives or dies, or we officially recognize it as a banana republic, complete with serfs and large populations of the “permanent poor” … and our Constitution becomes nothing more than a historical curiosity …

    I do not see our current status as a stable one … but then it never is …

  5. FunkyGawy says:

    Isn’t there another big post-1996 change? One I can think of is that a broader swath of companies chose to go public on these exchanges (and then got massively overvalued!).

    Short- and even medium-term I understand how fluctuations in the MktCap/GDP ratio under and over trends might provide information. I think longer-term the ratio could point out longer-term secular changes in the overall representation of the economy in the two listed exchanges tracked here. If an increasing proportion of the economy is happening in traded companies, one would actually expect the ratio of mkt cap to GDP to increase as well, even if valuation levels don’t change – though this would approach some limit obviously. Imagine this ratio for the new Cambodian stock exchange (zero!), or for other emerging markets. It’s just structurally different, which means we should pay attention to structural changes even in developed markets.

    The internationalization point made on the chart is a good one as well – though I’d say this is part of a far longer term trend.

    Indeed it’s good to break out and understand where and when the relationship embedded in a measure like MktCap/GDP might be bent, or where it might be broken. What assumptions does that relationship imply? When should the slope on the line change, and what would drive that?

    Over the loooooong term, financial markets have and overall economic growth has enjoyed a bunch of good things over the past 2 or 3 centuries…

    * more marketable production (i.e., subsistence production turns into market production, first in the West, now in the emerging/frontier markets);
    * more overseas trade (a corollary of the first);
    * population growth

    Finally the usual suspects have helped as well…
    * technological growth/greater productivity
    * declining risk levels for invested capital – yielding higher overall valuations.

    It’s not clear to me how long the trendline on the first three dynamics – which together mean “more people and production incorporated into an increasingly global market” – can persist. What does a change in that macro trend mean?

  6. adbutler007 says:

    Hey Barry, this is the perfect segue to our piece on Estimating Future Stock Market Returns, as we use a linear regression of long term stock market price data as one of the most statistically significant inputs to our model:


  7. lalaland says:

    It’s easy to see why the 90′s were above the trend line (internet) and why the 2000′s even made it (hot cash!) but from where I’m sitting pretty difficult to think of a reason why it should be again unless the burgeoning Chinese and Brazilian middle classes start buying from us in droves (ahahaha). Ehem.

  8. murrayv says:

    I think the long trend on the Market Cycles Above and Below is very misleading. In fact there are 5 trends: secular bear to about 1944, secular bull to 1966, secular bear to 1982, secular bull to 2000 and secular bear continuing now. Looked at that way we are above the present trend line, and due for another drop to below 10,000. Also the vertical scale from 250 to 1000 is wrong – it gives a log scale of 5x, 5x, 4x, 5x, 5x. Correcting that segment flattens the 1966-1982 secular bear, making it more apparent.

  9. SteveinMaine says:

    adbutler007: May I ask a question about your paper? I’m asking this as a total layman, with only a moderate amt. of experience in investing.

    I’m 45– hoping to retire at 64: I got out of equities in late ’07 (the ONLY smart thing I’ve ever done with money), so fortunately didn’t take the big hit. But, of course, I wasn’t smart enough to get back in in March ’09, so I sat on the sidelines of the entire run-up of the past couple years (which infuriates me, my being frozen and unable to act).

    Am I reading your paper right that you are predicting that, over the next 15 years, equities are going to return no more than 3% (annually), and probably closer to zero?

    I’ve been wracking (racking?) my brain trying to figure out what to do with my 401(k), which at this point is 90% short-term cash and only 10% equities.

    Thank you for your time.

  10. [...] Market capitalization as a % of GDP.  (Big Picture) [...]