what the stock market capitalization to gdp ratio can tell you
the use of the stock market capitalization to gdp ratio increased in prominence after warren buffett once commented that it was probably the best single measure of where valuations stand at any given moment 1 it is a measure of the total value of all publicly traded stocks in a market divided by that economy s gross domestic product gdp the ratio compares the value of all stocks at an aggregate level to the value of the country s total output the result of this calculation is the percentage of gdp that represents stock market value to calculate the total value of all publicly traded stocks in the u s most analysts use the wilshire 5000 total market index which is an index that represents the value of all stocks in the u s markets the quarterly gdp is used as the denominator in the ratio calculation typically a result that is greater than 100 is said to show that the market is overvalued while a value of around 50 which is near the historical average for the u s market is said to show undervaluation if the valuation ratio falls between 50 and 75 the market can be said to be modestly undervalued also the market may be fair valued if the ratio falls between 75 and 90 and modestly overvalued if it falls within the range of 90 and 115 in recent years however determining what percentage level is accurate in showing undervaluation and overvaluation has been hotly debated given that the ratio has been trending higher over a long period of time the market cap to the global gdp ratio can also be calculated instead of the ratio for a specific market the world bank releases data on the stock market capitalization to gdp for world which was 92 in 2018 2 this market cap to gdp ratio is impacted by trends in the initial public offering ipo market and the percentage of companies that are publicly traded compared to those that are private all else being equal if there was a large increase in the percentage of companies that are public vs private the market cap to gdp ratio would go up even though nothing has changed from a valuation perspective example of how to use the stock market capitalization to gdp ratioas a historical example let s calculate the market cap to the u s gdp ratio for the quarter ended september 30 2017 the total market value of the stock market as measured by wilshire 5000 was 26 1 trillion 3 u s real gdp for the third quarter was recorded as 17 2 trillion 4 the market cap to gdp ratio is therefore market cap to gdp 26 1 trillion 17 2 trillion 100 151 7 begin aligned text market cap to gdp frac 26 1 text trillion 17 2 text trillion times 100 151 7 end aligned market cap to gdp 17 2 trillion 26 1 trillion 100 151 7 in this case 151 7 of gdp represents the overall stock market value and indicates it is overvalued in 2000 according to statistics at the world bank the market cap to gdp ratio for the u s was 153 again a sign of an overvalued market with the u s market falling sharply after the dotcom bubble burst this ratio may have some predictive value in signaling peaks in the market however in 2003 the ratio was around 130 which was still overvalued but the market went on to produce all time highs over the next few years as of 2020 the ratio stands at roughly 150 