Ron Griess of The Chart Store was none too impressed with the post Are Stocks Ahead of the Economy?, especially, the WSJ chart we criticized.

He points out that “the data for the chart of GDP and market cap goes back a lot further than 1995. (Whether such a comparison is meaningful is another story).” At the very least, the short time period was questionable given the rich data history available.

Ron is the conscience of chart watchers everywhere, and his advice is “If you are going to show GDP and Market Cap, a ratio chart is much better than the chart referenced from the WSJ.”

And of course, he has one handy:

 

 

Category: Markets

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.

14 Responses to “Market Cap/GDP Ratio”

  1. ConscienceofaConservative says:

    At least in the 1990′s the economy was on the upswing. And today we have an interesting phenomenon. The market is going up yet shareholders aren’t happy with company performance. What does that say?

    http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9247055/BlackRocks-Michelle-Edkins-behind-wave-of-shareholder-revolts.html

  2. SOP says:

    Reversion to the mean, Reversion to the mean,
    We shall come rejoicing, reversion to the mean.

  3. wj says:

    And the only reason it has not reverted to the mean is the FED printing dollars.

  4. wcmatt says:

    Hi, long time reader but just registered in order to comment.

    This is a ratio of US companies to US GDP? Looks as expected to me. Market cap is a function of profit, and US companies are increasingly profiting from 1) Lowering costs via globalization, and 2) Selling into developing economies, aren’t they?

    It wasn’t long ago when I think this blog remarked how many iPhones Apple is now selling into China, for the easiest example.

  5. kaleberg says:

    The US civilian economy has been flat since 1980, so there we’re seeing two market capitalization drivers: (1) higher return on overseas investment as firms follow rising incomes and (2) lower acceptable return on capital which shows up as high P/E ratios. As you can see in the chart, this isn’t sustainable.

    (1) Overseas returns are not sustainable because as companies get entrenched they tend to fight the government policies that led to the rising incomes that attracted them. It’s basically an arbitrage play. The whole point is to profit from someone else paying the requisite rising wages that create consumer demand. Implement a pro-business economic policy and the demand weakens and then vanishes.

    (2) Falling ROI is not sustainable either since market capitalization in the face of falling returns requires finding successive rounds of suckers. Since the economy has been flat for decades, the pool of suckers has slowly been shrinking. The old pension funds are long gone, and IRAs and 401ks have been shrinking. It’s not that the suckers learn. It’s that they run out of money to take.

    Market capitalization is based on security prices, so it has nothing to do with actual value. It seems there was a capitalization bubble that is slowly deflating. Who knows? Maybe we’ll shift back to the old discredited model and start growing the non-business economy again.

  6. lebowski007 says:

    assuming one lives to 100 years and has money to buy at the bottom 50% (small bankroll for this 43 year old in the hype of 2000 for my cycle and then 33 yo) or sell at the top during the cycle 150% with whats left of the bankroll 12 years later, whats a twit to do in the meantime? 100% cash snice mid april, playing momos short on weekly options and fearing QE3, and other head fakes like ISM on tuesday while i try to sleep. good times. so why wouldn’t hollande’s win be seen as more bullish? i really liked your confidence series. so true for my generation down to 18-34, as if they are even tuned in. i suspect their hidden desire is all the fat cats lose all their dough and learn to live with their parents.

  7. lebowski007 says:

    and 2000 was no bottom….

  8. Frilton Miedman says:

    Put that chart side by side with consumer debt & wealth disparity, they’re practically the same 3 charts.

  9. constantnormal says:

    Market cap is basically an indicator of how popular stocks are as an investment vehicle. The fact that they have stayed above trend since “Easy Al” and “Boom-boom” have been pumping money into the economy and driving bond rates down-down-down tells me that the Fed’s monetary stimulus for banksters has not been applied to the usual and customary uses by the banksters (lending it back out, spreading it around the economy), but was instead taken to the Stock market casino via their proprietary trading business.

    Can somebody tell me again exactly why we need these banks? What role do they fill in out economy?

  10. Simon says:

    Refer to comments at 5:38 pm. Is there any reason to doubt this? The Fed is the bank that makes banks richer. It does this by stealing from the majority to give to the rich. The majority have started to protest. Expect that trend to continue. Where it will end nobody knows.

  11. [...] How should we interpret the market cap/GDP ratio?  (Big Picture) [...]

  12. Jim67545 says:

    I don’t know how or why this is significant. To conclude that we necessarily must revert to the mean would suggest that society and the composition of the economy will revert to whatever it was in 1985. I don’t get it.

  13. streeteye says:

    The market cap is investors’ estimate of the present value of future cash flows from stocks ; depending on the returns to capital v. labor (bargaining power of labor), level of interest rates, taxes, profits earned abroad, the equilibrium market cap/GDP could vary pretty widely.

  14. rd says:

    I understand the argument that the US-listed companies have become more global and get more revenue/profits from overseas so the market cap should be much less linked to US GDP. However, other market valuation ratios such as Tobin’s Q, Shiller’s CAPE, and dividend yield show similar patterns as this chart. Since they are normalized to the performance of the companies that make up the index themselves instead of a national value, I don’t think the “This Time is Different” argument flies. If the company valuations had truly separated from the US GDP, then we should see those other valuation measures at levels below the top quintile.

    It is clear to me that that we are seeing the impact of low returns of alternative investments as a major current driver for stock market valuations. This will end badly unless interest rates can rise due to a rapid acceleration of economic growth which will allow earnings and dividends to grow rapidly. I don’t see evidence that this will start soon.