Market Cap as a percentage of GDP

[IndependentlyPoor]

Back in the tech. bubble days, I had this chart posted in my office (in the R&D center of a chip maker mega-corp). Think of what is says. The Market Cap. is the value of all big businesses in the U.S. The GDP is the value of what they (and the small guys) produce. You would think that it would be fairly constant, but noooo.....

Well, anyway, hot shot engineers and mathematicians used to come into my office and sneer at it. The chart looked awful then (1999-2000). It was zooming up with no end in sight, but these guys were 100% invested in the market, and most of them over-weighted in tech. stocks. They were leaders in the field and, justifiably, felt that they had specialized knowledge that gave them an investing edge. They lost their shirts (well, their 401(k)s anyway) in the crash, and I tactfully took it down.

I still think it is worthwhile keeping in mind.

Vanguard used to publish this in their dead tree version of "In the Vanguard" but I can't find it on their website now.
I got this one from
Market Capitalization as a Percentage of GDP | The Big Picture

 

[Darryl]

Q-Ratio graph looks similar The Q-Ratio: Valuing the Stock Market

 

[youbet]

Very interesting metric! Thanks for posting.

 

[audreyh1]

It might be good to plot inflation/interest rates along with the graph. I bet that explains some of the plunges - or at least the one during the 70s.

Audrey

 

[IndependentlyPoor]

It might be good to plot inflation/interest rates along with the graph. I bet that explains some of the plunges - or at least the one during the 70s.

Audrey

I was hoping somebody would ask that. I just happen to have some handy-dandy charts here on my desktop.




These are all from the Case-Shiller data. I included just from 1950 because my poor MacBook starts to thrash with the full dataset (Loading it into my spreadsheet gobbles more than 1Gig of memory!) and I believe that the world has changed so much that pre-war data doesn't mean much for this discussion anyway.

I apologize for the colorless charts. For some reason color has stopped working on charts with different left and right axes... just when you want it most.

I would be happy to post the spreadsheet if anybody wants. Maybe Excel can handle big datasets better than the Mac Numbers program.

 

[haha]

WOW, IP, these are great. But mine do show color.

I'd like to see thespreadsheet also.

Ha

 

[IndependentlyPoor]

I'd like to see thespreadsheet also.

Here ya go.
View attachment Shiller data 1950.xls
This is exported from Numbers, so some of the formatting might be a lit wonky. Let me know if you have any trouble with it.

 

[Gone4Good]

Q-Ratio graph looks similar The Q-Ratio: Valuing the Stock Market

As does a PE graph. But both the Q-Ratio and PE-Ratio seem to show current valuations a lot closer to average than the ratio to GDP. By judging from the OP chart, valuations today are as high as they were before the '29 crash. Meanwhile, Shiller's PE-10 graph shows current valuations well below those of '29, and lower than in the '60's as well. I wonder if the discrepancy is due to the fact that large companies generate an increasing share of their earnings outside the US and therefore earnings / GDP is higher today than it was in the past.

I also wonder if our economy is more incorporated today than it was in the 1920's. It certainly seems to me that the stock markets today are probably a lot more representative of the economy as a whole than was true when mom and pop businesses ruled the world. So part of the inflated value shown in recent years may be attributable to simply adding more businesses to the numerator of the ratio.