Stock market cap to GDP ratio warrants caution
Barry Ritholtz at The Big Picture blog posts an interesting – and scary – chart showing total stock market capitalization in the United States versus U.S. GDP. (At least I think that’s what the chart shows: his headline indicates that the plot is of Nasdaq capitalization, but the chart description says it includes both Nasdaq and NYSE stocks.)
Ritholtz points out that the total value of the stock market has now, once again, reached 100% of GDP. The only times it has hit that level in the past were during the dotcom bubble and the housing bubble. “The present Zero Interest Rate Policy (ZIRP) is helping inflate a 3rd market bubble,” he writes.
Critics will take issue with his logic, of course. The most common objection is to argue that the link between U.S. market cap and U.S. GDP isn’t necessarily a constant. Maybe U.S. firms have growing international operations. Maybe more foreign firms are listing on U.S. exchanges. Both would distort the ratio of U.S. stock market capitalization to U.S. GDP.
Fair enough. But the sheer magnitude of the increase over the past 15 years or so seems to defy easy explanation. And the strong correlation between peaks in the chart and past stock market bubbles provides food for thought.
Note that the chart doesn’t claim to predict the immediate future. The first time that the ratio of stock market cap to GDP hit 100% was in 1996. It was another four years before the market turned decisively down.
So the chart isn’t saying to dump everything and load up on tinned food; instead, its message is to be cautious. And that seems like a very reasonable sentiment right now.
Freelance business journalist Ian McGugan blogs for the Financial Post
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Stock market cap to GDP ratio warrants caution
