Ping: Old_Skeet - US Equity Funds and Their Valuation as a Percentage of GDP

bee

@Old_Skeet,
I enjoy and appreciate reading you market valuation updates and I came across this chart that values the US Equity Market in terms of US GDP....Market Cap to GDP. A quote from the linked article below:

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."

I believe it is an attempt at comparing the historical price of US equities to the historical US GDP data. Here's the historical chart which dates back to the 1970 - today:


I added two "best fit" long term (45 years) trend lines with a 20% channel between the lower trend line (red) and the upper (green). What I find interesting about GDP is that it is less speculative than the Equity market and a truer reflection of how well an economy is performing. So, by comparing the two I believe the speculative nature of equity valuation ("are stocks expensive" vs "are stocks it cheap") should reveal itself, at least when compared to what the equity market should be a true reflection of, GDP.

De-trending the data would look like this:


Here's are some other sites that track US Equity Valuation as a percentage of GDP:

https://ycharts.com/indicators/us_total_market_capitalization

Article on this Valuation Matrix:
market-cap-to-gdp-an-updated-look-at-the-buffett-valuation-indicator

Investopedia's Definition of What is the 'Stock Market Capitalization To GDP Ratio'?
marketcapgdp

davfor

@bee

This might also interest you. It includes a recession indicator...

https://fred.stlouisfed.org/graph/?g=qLC

Old_Skeet

@bee,

Thanks for the information and links. In my brief review of this information ... Well, it just confirms that the stock market is richly priced. Does it mean the market is going to correct anytime soon? Probally not in view of the recent passage of tax reform. With this, I look for stocks to get even more pricey. And, if you own stocks as most of us on the board do ... our portfolios should increase in their value.

Many have talked about financial engineering at the corporate level and it now seems to have found its way into government. With the Corporate cash that is expected to come back to the US I'm thinking a good bit of it will be used by a good number of companies to buy back their own stock. In doing this it will reduce the amout of shares in float thus spreading corporate earnings over less shares thus increasing profits without an increase in revenue. I'm also thinking that there will not be a lot spent for capital inprovements for plant expansion and moderaziation; and, with unemployement at about 5% well, it just can not get much lower. Again, this will benefit stock holders.

I might make a lot of typos in my typing; but, I still think well enough to figure this out. In addition, I am not expecting the average working citizen to catch a windfall in the form of benefits and pay raises from thier companies.

I could continue ... but, what's the point. It all boils down to financial engineering.

Skeet

davidrmoran

I read more than one historian this week who pointed out that high valuations have never caused a bull market

bee

@davfor...nice source information with recessions in gray. Thanks.