What Is the Stock Market Capitalization-to-GDP Ratio?
The stock market capitalization-to-GDP ratio is a ratio used to make a decision whether or not or now not an general market is undervalued or hyped up compared to a historic average. The ratio can be used to be aware of explicit markets, such since the U.S. market, or it can be carried out to the global market, depending on what values are used throughout the calculation. It is calculated thru dividing the stock market cap thru gross house product (GDP). The stock market capitalization-to-GDP ratio is often referred to as the Buffett Indicator—after investor Warren Buffett, who popularized its use.
Device and Calculation of the Stock Market Capitalization-to-GDP Ratio

get started{aligned} &text{Market Capitalization to GDP} = frac{ text{SMC} }{ text{GDP} } events 100 &textbf{where:} &text{SMC} = text{Stock Market Capitalization} &text{GDP} = text{Gross House Product} end{aligned} ​Market Capitalization to GDP=GDPSMC​×100where:SMC=Stock Market CapitalizationGDP=Gross House Product​
- The stock market capitalization-to-GDP ratio is a ratio used to make a decision whether or not or now not an general market is undervalued or hyped up compared to a historic average.
- If the valuation ratio falls between 50% and 75%, {the marketplace} can also be discussed to be modestly undervalued. Moreover, {the marketplace} could also be fair valued if the ratio falls between 75% and 90%, and modestly hyped up if it falls throughout the range of 90 and 115%.
- The stock market capitalization-to-GDP ratio is often referred to as the Buffett Indicator—after investor Warren Buffett, who popularized its use.
What the Stock Market Capitalization-to-GDP Ratio Can Tell You
The use of the stock market capitalization-to-GDP ratio better in prominence after Warren Buffett once commented that it used to be as soon as “maximum without a doubt the most productive single measure of where valuations stand at any given 2d.”
This is a measure of the entire worth of all publicly traded stocks in a market divided thru that monetary gadget’s gross house product (GDP). The ratio compares the cost of all stocks at an mixture stage to the cost of the country’s basic output. The result of this calculation is the share of GDP that represents stock market worth.
To calculate the entire worth of all publicly traded stocks throughout the U.S., most analysts use The Wilshire 5000 Normal Market Index, which is an index that represents the cost of all stocks throughout the U.S. markets. The quarterly GDPÂ is used since the denominator throughout the ratio calculation.
Most often, a result that is greater than 100% is said to show that {the marketplace} is hyped up, while a worth of spherical 50%, which is as regards to the traditional average for the U.S. market, is said to show undervaluation. If the valuation ratio falls between 50% and 75%, {the marketplace} can also be discussed to be modestly undervalued.
Moreover, {the marketplace} could also be fair valued if the ratio falls between 75% and 90%, and modestly hyped up if it falls throughout the range of 90% and 115%. In recent years, alternatively, working out what quantity stage is proper in showing undervaluation and overvaluation has been hotly debated, given that the ratio has been trending higher over a longer time frame.
{The marketplace} cap to the global GDP ratio can also be calculated as a substitute of the ratio for a decided on market. The World Monetary establishment releases knowledge on the Stock Market Capitalization to GDP for World which used to be as soon as 92% in 2018.
This market cap to GDP ratio is impacted thru trends throughout the initial public offering (IPO) market and the share of companies which can be publicly traded compared to those that are non-public. All else being an identical, if there used to be as soon as a large increase throughout the share of companies which can be public vs. non-public, {the marketplace} cap to GDP ratio would move up, even if now not the rest has changed from a valuation perspective.
Example of Discover ways to Use the Stock Market Capitalization to GDP Ratio
As a historic example, let’s calculate {the marketplace} cap to the U.S. GDP ratio for the quarter ended September 30, 2017. The full market worth of the stock market, as measured thru Wilshire 5000, used to be as soon as $26.1 trillion. U.S. precise GDP for the third quarter used to be as soon as recorded as $17.2 trillion. {The marketplace} cap to GDP ratio is, because of this truth:

get started{aligned} &text{Market Cap to GDP} = frac{ $26.1 text{ trillion} }{ $17.2 text{ trillion} } events 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 entire stock market worth and indicates it is hyped up.
In 2000, in step with statistics at The World Monetary establishment, {the marketplace} cap to GDP ratio for the U.S. used to be as soon as 153%, all over again a sign of an hyped up market. With the U.S. market falling sharply after the dotcom bubble burst, this ratio could have some predictive worth in signaling peaks available in the market.
However, in 2003, the ratio used to be as soon as spherical 130%, which used to be as soon as nevertheless hyped up, on the other hand {the marketplace} went on to offer all-time highs over the next few years. As of 2020, the ratio stands at roughly 150%.
