click for larger graph

 

Its time to rerun the latest version of this classic Chart Store work showing the relationship between total Market Capitalization of NYSE + Nasdaq relative to national GDP.

The compression that we have been experiencing since 2000 is still underway — I haven’t the foggiest when it is going to end.

 

Category: 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.

18 Responses to “Market Capitalization as a Percentage of GDP”

  1. Frilton Miedman says:

    Well…I mean…ya never know, GDP could suddenly just surge by 200% and neutralize mean reversion – right?, it could happen..right?

  2. Iamthe50percent says:

    AT&T reported 10 percent growth in earnings y-on-y with wireless operating margins up to 30.3 percent from last year’s 26.9 percent. Sales of smartphones were 5.1 million units, iPhone activations were 3.7 million while 61.9 percent of its post-paid subscriber base have smartphones compared to only 49.9 percent last year.

    So far today AT&T is down 2.32%. It’s been falling a few percent a day for days. ???

    There seems to be no correlation with GDP, earnings, profitability or anything but Spanish Bonds. Spanish Bonds? What the Hell do Spanish Bonds have to do with AT&T? Las Vegas makes more sense and the casinos have beautiful girls in floor shows besides. I’d rather look at a Vegas show girl than Kudlow or Kramer.

  3. techy says:

    Isnt a big part of profits come from overseas these days?? GDP is falling but profits are not?? what about the interest rates, will things be same at 5% vs 2%??

  4. cluben1 says:

    Just thinking, 40+% of S&P500 company’s revenues are global now. I imagine that would be similar across the board for all public companies (maybe not upto 40%). Therefore, gross DOMESTIC product would only apply to~60% of Market Cap, which would be more aligned with the historical average.

    However, that doesn’t explain the spike in the 90s. Thoughts…

  5. Bruman says:

    I look at MarketCap/GDP ratios sometimes too. They’re interesting, but frankly, I never really know how to interpret them.

    They’re a little like one giant P/E ratio (with market cap as P and GDP as E), but they are influenced by so many things that P/E ratios aren’t:

    1) What % of GDP is created by publicly traded companies in the index? This can change dramatically over time.

    2) How much of the market cap represents claims on non-US GDP revenues and non-US assets?

    3) Are companies changing their leverage ratios? Because if net earnings are growing faster than GDP, you would expect to see the ratio rise over time, and leverage will do that. So TEV/GDP may be a more informative ratio than MktCap/GDP?

  6. Lee Adler says:

    Decline since 2000 mirrors the growth of private equity and fewer companies going public.

  7. Frilton Miedman says:

    cluben1 Says:
    July 24th, 2012 at 1:03 pm

    ” However, that doesn’t explain the spike in the 90s. Thoughts… ”

    The mainstream advent of MBS derivatives , CDO & CDS’s, started at around that time, not saying that’s it…but in conjunction with the rise of post-CRA home ownership, real estate would be a candy store left unwatched for Wall St….ESPECIALLY once Glass-Steagall was removed and the CFMA was created.

    I am NOT saying it was the fault of the CRA, it was unquestionably the fault of the banks. convenient assumptions that “free markets” always function for the best of society when left unregulated.

  8. warren.buffett says:

    Q1: Does the market-cap of NYSE + Nasdaq include foreign companies (ADR)?
    Q2: What % of the revenues these listed companies derive from USA? What % from ROW?

    Without answers to these questions, it’s just an idiot analysis (like the one you find regularly on Zerohedge)

  9. Bam_Man says:

    Looks like we be headed back for dat 60% line. Pullin like a magnet since 2000. I figure we gets there (Dow 6,000) sometime next year.

  10. constantnormal says:

    If you believe in reversion to the mean, and that line connecting the recent peaks is at all representative, then, allowing for the inevitable downside overshoot, it looks like about … what, 2024?

  11. constantnormal says:

    Those “above the Greenspan line” peaks represent the amount of digging that has been done to prepare a fitting grave for the Fed. While there have been a lot of contributors to this, corruption in government, rabid deregulation, economic inequality spreading like a cancer, the one thing that was absolutely essential for this situation to come about was a Fed with both feet mashing the monetary gas pedal to the floor … a situation that continues to this day.

    But it won’t continue forever. The Fed can only support the banksters for so long, then the economy rolls over and the banksters die, taking the Fed (and the nation) with them.

  12. idaman says:

    Barry, could you plot another line in the same chart with private sector debt/GDP?

    Very curious. Thanks.

  13. Frilton Miedman says:

    Constant, though I agree with everything you just said, I don’t necessarily fault the Fed for their actions.

    I see it more as a gradual sequence of Feds RE-actions to offset drunk-stupid fiscal policy….”trickle down”, 15% cap gains on income for wealthy market manipulators that profit from economic counter-productivity…etc.

    As inequity grows, the Fed has been cornered into offsetting it with increasingly lower rates to at least avail cheap credit, buying time for wage growth that just isn’t happening.

    My take, the outcome was predicted 60 years ago by the Fed chair during the Great Depression, Marriner Eccles Poker Chip scenario, where credit without wage growth leads to implosions like the Great Depression, and where we are now….there’s a limit to monetary policy without a fiscal counterpart, money doesn’t grow on tree’s, the US consumer isn’t an endless source of money without wages to compensate consumption.

  14. constantnormal says:

    Frilton, we are pretty close together on this, mostly different wording, with some small variations.

    I think that the Fed’s dual mandate is a joke, or is seen as one inside the Fed.

    When you consider the range of the possible actions the Fed can take, and then look at what they have done to support the TBTF types (making their nickname have meaning in the process), you can see that the Fed is not in the slightest interested in doing anything to foster wage growth or manage economic inequality — although they are acutely aware of it, as one sees in paper after paper.

    They don’t even care about the smaller banks, and are content to maintain conditions that are forcing them to either become bigger or die. The smaller banks are the responsibility of the FDIC, stated by the Fed’s actions, if not in their words.

    Those are my beefs with the Fed. They have essentially unlimited economic power and might — they can create or withdraw money, and have the ability to seed it anywhere in the economy. And they are not clueless idiots, for the most part (Greenspan excepted). They have their goals and stick to them. But a vibrant and diverse economy is just not in their set of goals … they hope that the TBTF banks will do that for them (but know that they will never do so).

    Kinda like parents with kids gone bad, that won’t change them (probably can’t at this point), and won’t cut them off.

    But without the Fed to keep these bad kids in cars and cocaine, this situation would have had a natural resolution long ago. That’s why I fault the Fed … it’s not necessarily the primary cause of all this, but it is certainly the only thing that is keeping a solution to these problems from asserting itself.

  15. kek says:

    The compression ended on 10/9/02, as most averages have compounded 6-10% annually since that time. The 2000 cliff, brought to you by the Bogleheads at Vanguard buying PFE, KO, GE etc. at 40x gave you the shitstorm of 2000-2002.

  16. rl2604 says:

    A couple of thoughts:

    1) You can consider this graph to be similar to Price/Sales where the price represents the market cap and sales, GDP. If we assume profit margins are held constant (big assumption and not true today- e.g. today’s profit margins are significantly higher than historical average) the growth in sales would be proportional to growth in earnings/profits in the aggregate hence the chart looks similar to a historical P/E chart that I am accustomed to seeing.

    2) The rise from 1992 to 2000 has more to do with the spectacular rise in the market cap of the NASDAQ (read- tech bubble) but also from a rising P/E expansion since the 1980s for both the NYSE and the NASDAQ.

    3) Is this chart helpful? eh….I find the historical 10-yr average P/E chart more direct and helpful. However, in any event, if we are headed for mean reversion (which i believe) then at the current rate, we will have an extended bear market for another 10 or so years- much longer than people expect. With this, I see two scenarios that drive the next 10-year bear: either profit margins will collapse to historical norms, thereby crushing earnings and the P/E multiple at the same time as people discount lower future earnings and/or we have a significant inflationary environment 5 or so years down the road where nominal GDP rises faster than the market cap of the stock market (this was true in the high inflationary environment of the 1970s). If you’re wondering about all of the debt/wealth that we have accumulated during the past 30 years (as for every debt that is issued, that is somebody’s asset/wealth), in the former case we have default through principal reduction, while in the latter we have effectively defaulted through devaluation of future debt repayment.

  17. riley says:

    Frilton Miedman Says:
    “convenient assumptions that “free markets” always function for the best of society when left unregulated.”

    nothing works well with anarchy. “free markets” function best not when left unregulated, but when minimally regulated with regulations that are not designed to benefit one group at the expense of another. most importantly “free markets” function best when laws and regulations are enforced and corruption and fraud are punished.

  18. [...] Market Capitalization as a Percentage of GDP | The Big Picture NYSE + NASDAQ combine market caps falling fast toward 100% of GDP, down from 180% high in 2000, 144% in 2007. Ratio first crossed 100% in 1996, when Alan Greenspan mentioned “irrational exuberance.” [...]