What 🦩Is the Stock Market Cap꧟italization-to-GDP Ratio?

The stock market capitalization-to-GDP ratio is a ratio used to determine whether an overall market is undervalued or overvalued compared to a historical average. The ratio can be used to focus on specific markets, such as the U.S. market, or it can be applied to the global market, depending on what values are used in the calculation. It is calculated by dividing the stock market cap by 澳洲幸运5开奖号码历史查询:gross domestic product (GDP). The stock market capitalization-to-GDP ratio is also known as the Buffett Indicator—after investor 澳洲幸运5开奖号码历史查询:Warren Buffett, who popularized its use.

Formula and Calculation of the Stock Market Capital𒅌ization-to-GDP Ratio

 $\begin{aligned} &\text{Market Capitalization to GDP} = \frac{ \text{SMC} }{ \text{GDP} } \times 100 \\ &\textbf{where:} \\ &\text{SMC} = \text{Stock Market Capitalization} \\ &\text{GDP} = \text{Gross Domestic Product} \\ \end{aligned}$​Market Capitalization to GDP=GDPSMC​×100where:SMC=Stock Market CapitalizationGDP=Gross Domestic Product​

What the Stock Market Capitalization-to-GDP 𒅌Ratio 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."

It is a measure of the total value of all publicly traded stocks in a market divided by that economy's 澳洲幸运5开奖号码历史查询:gross domestic product (GDP). The ratio co🧸mpares 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 澳洲幸运5开奖号码历史查询:The Wilshire 5000 Total Market Ind🦹ex, which is an index that represents the value of all stocks i🀅n the U.S. m🔴arkets. 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 ra꧃tio 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 lon⛄g 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.

This market cap to GDP ratio is impacted by trends in the 澳洲幸运5开奖号码历史查询: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 pers𝓀pective.

Example of How to U♐se the S🌸tock Market Capitalization to GDP Ratio

As 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. U.S. real GDP for the third quarter was recorded as $17.2 trillion. The market cap to GDP ratio is, therefore:

 $\begin{aligned} &\text{Market Cap to GDP} = \frac{ \$26.1 \text{ trillion} }{ \$17.2 \text{ trillion} } \times 100 = 151.7\% \\ \end{aligned}$​Market Cap to GDP=$17.2 trillion$26.1 trillion​×100=151.7%​

In this case, 151.7% of GDPജ represents th♌e overall stock market value and indicates it is overvalued.

In 2000, according to statistics at 澳洲幸运5开奖号码历史查询:The World Bankꦜ, 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 we🦩nt on to produce all-time highs over the next few years. As of 2020, the ratio stands at roughly 150%.