Thursday, February 6, 2014

Market Cap to GDP

First class and fancy free
She's high society
She's got the best of everything
--Tal Bachman

Over a decade ago, Warren Buffett offered the ratio of stock market capitalization to GDP as an effective measure of overall equity value. It is hard not to like the aggregate, macro feel of the numerator and denominator components. Moreover, the denominator is a bit harder to manipulate than some other valuation metrics such as the P/E ratio.

Doug Short provides an updated glimpse of the mkt cap:GDP metric in this missive.

His ratio of Wilshire 5000 market cap:GDP is shown above (FRED worksheet here).

By this metric, today's stock market valuations have surpassed the peak prior to the 2008 credit collapse. Current valuations are higher than any time since 1970 save for the late 1990s run-up prior to the bust.

Note also that the slopes of the declines following the two previous peaks are much steeper than the slopes of the advances that preceded the peaks.

position in SPX

1 comment:

dgeorge12358 said...

Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once unthinkable dosages will almost certainly bring on unwelcome after-effects. Their precise nature is anyone's guess, though one likely consequence is an onslaught of inflation.
~Warren Buffett