Market Cap to GDP

Wilshire 5000 to GDP Ratio

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Interpretation

Market Cap to GDP is a long-term valuation indicator for stocks. It 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." The Wilshire 5000 Index is widely accepted as the definitive benchmark for the U.S. equity market and is intended to measure the total market capitalization of most publicly traded companies headquartered in the United States.

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The Original Buffett Indicator

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Interpretation

The original measure for 'market cap' is 'Market Value of Equities Outstanding'. It has the disadvantage of merely being published quarterly. Therefore, it is always lagging a bit behind. On the upside, it has data going back to the 1940s, thereby providing more historical perspective. Including this data leads to a lower mean average.

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DOW to GDP Ratio

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Interpretation

In contrast to the Wilshire 5000, the Dow Jones only contains 30 publicly traded companies. The index is price-weighted, so stocks with a higher share price are given greater weight. For these reasons, it is not as accurate as the Wilshire 5000 for measuring the market capitalization. However, all these ratios look very much the same - and since the Dow Jones is one of the oldest indexes, this ratio goes back to 1790.

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S&P 500 to GDP Ratio

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Interpretation

For comparison purposes the S&P 500 to GDP ratio is shown here as well. The S&P 500 consists of 500 large US companies. Just like the Wilshire 5000, it is a capitalization-weighted Index. It captures approximately 80% of the available total market capitalization. For these reasons, it's a much better measure for 'market cap' than the Dow Jones - however, the two charts look very similar.

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S&P 500 vs. GDP

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Interpretation

As mentioned above, the S&P 500 captures approximately 80% of available market capitalization. Therefore it is quite representative of the entire stock market. Intuitively, the stock market and the GDP should grow with a similar pace. However, this version of the S&P 500 is a price index in contrast to a total return index. Therefore, it does not include dividends, which might explain why since 1871 it has underperformed the overal economy.

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