Total Stock Market Capitalization Relative to GDP Indicates Equities Pricey
One metric that value investors look at to determine the overall attractiveness of equity prices is the ratio of stock market capitalization relative to Gross Domestic Product (GDP). Historically, stock market capitalization has averaged 70% of GDP. During the worst stock market eras, 1930’s and 1974-1982, this ratio was hovering as low as 40% [link].
Gurufocus maintains a chart that is updated daily with the current relative data. It shows that, as of today, the ratio of total market cap of publicly traded companies divided by GDP is currently at 116% which is definitely in the pricey range (see below). As mentioned by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.” The size of the US economy is measured by Gross National Product (GNP). Although GNP is different from GDP (gross domestic product), the two numbers have always been within 1% of each other.
During the craziness of 1999-2000, the ratio of total market cap to GDP hit 190% (when factoring in all public and private companies) so there is precedent for the market to move significantly higher from here, although this would appear to be a risky bet. For the market to achieve the same relative level as March 2000, equities would need to rise another 30%, given no change to GDP. A drop back to the average level of the TMC/GDP ratio since 1930 would imply a drop of 40%.