Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
General

Market-Cap to GDP: Nonsense, says Moneylife

Moneylife doesn’t like the market-cap to GDP indicator.

Consider for instance, the period between 1994 and 2003 when the economy grew every single year, clocking average GDP growth of 6.8% a year. What did the Sensex do during this period? Shocking, but during this very period, the Sensex was down a massive 39%! So the idea that you should hold on to your stocks, or buy some more since India’s GDP growth is going to be strong, is bunkum.

There are similar instances from other economies too. Asian economies like South Korea, Taiwan and Japan enjoyed some periods of scorching economic growth in the latter half of the 20th century. Surely, their stock markets were on fire too, as expert views would suggest. Not quite.

Taiwan clocked a GDP growth of over 5% between 1990 and 2008. How did its stock market fare during this period? It fell almost 50% from its level of 12,000 on January 1990. Taiwan’s economic growth story is one of great success but its stock market performance is one of the worst in the developing world. It pays to look at facts before peddling an opinion.

Can’t deny they have a point. Stock markets are hardly a barometer of the economy – consider that from Jan 2008 to now, the stock markets are FLAT – but on a nominal basis, our GDP has grown about 40% (from 49 lakh-cr. to 69 lakh-cr.).

Overall, the market-cap-to-GDP figure may not indicate that we are NOT in a bubble. But could a high figure indicate we ARE in a bubble? I’m not sure about that either. Look at a long term chart (thanks Kaushik, [Source])

Market Cap to GDP 1976-2007

and a chart I made for after that:

Mkt Cap to GDP

We’re still above the 100% mark – and historically, crossing the 100% mark has not lasted too long – about six months. But then the US has spent about 13 of the last 14 years above 100%! (source: Barry Ritholtz and The Chart Store)

Ritholtz/The Chart Store: US Market Cap to GDP

Other related posts:

Conclusion: Move along, nothing to see here. I doubt this is anything more than just a correlation – there’s not much weight in the idea that stock market capitalization relates to GDP in any meaningful way.  Of course, I would love to hear alternative thoughts.

  • Anonymous says:

    >Hey, I am a big fan of your blog. There is a similar article here..

    http://capitalstock.wordpress.com/2010/06/22/m-capgdp-ratio-some-thoughts/

  • Anonymous says:

    >Since 1994 infy, stayam, wipro, niit, zee, bharti, hdfc, hdfc bank, hul and tons of stock gave superlative returns. Out of this world kind of returns. There might be more stocks then this bunch. in 2000-2003 PSU ruled the rooster.

    So it is better to find where the GDP is growing….right now auto's are booming in india.

    While you are just fixated over Arvind and index the same story will repeat again and again stocks give returns not index.

    Read buffets presentation in 1999-2000 where he said why in next 16 years US stock would give hardly any returns and RJ 2002 interview where he predicted this bull market…Both proved correct again and again and again and again and again and again.

    You need that kind of understanding for making any prediction not this money life type of scare mongering magazine or for that matter erstwhile matt tabibi.

    BTW any tips :)))))))

  • Anonymous says:

    >Bunkum bunkum bunkum

    PHARMA,( TONS OF LISTED CO.) IT,( TONS OF LISTED CO ) MEDIA,( Okay No Of Co. ) TELECOM, Thats where the GDP was growing. IT changed india, if somebody had sold infy or tech, pharma stocks by using this type of logic he should committed suicide.

    Sector death, sector emergence, cycles,

    Moneylife hahaha..Bunkum magazine.

    Totally bunkum.

  • Anonymous says:

    >deepak i wrote so much but no response.

    Or my post is also totality bunkum bunkum.

  • Deepak Shenoy says:

    >Anon: Would you have a link to Buffett's presentation? Buffett has been wrong too, like on the dollar. RJ thought we would still go up before Lehman. Everyone is right and wrong, it doesn't do us too much good to only remember when they were right. That way if you keep sayign market will go up one day you'll be proved right.

    Also this has nothing to do with market cap to GDP, but I agree that the return is all in stocks, not in the index.

  • Anonymous says:

    >http://www.slideshare.net/hblodget/warren-buffett-makes-4-market-calls-presentation

    Look for the sun valley speech, for RJ 2002 interview was in ET.

    The full buffet article has charts and graphs don't know look for sun valley speech in 1999.

    We cherish the guys who help us make money and who's misses are less then there hits. There performance in stock market is for everyone too see. They are both gurus and RJ style is more suited for indian markets

  • Anonymous says:

    >Wouldn't you agree buffet does through study about future probabilities.

    Now this is new stuff to me……….. % of GDP to corporate profits,competition to put a cap on profits, valuation at the peak of the cycles, peaking of corporate profits as a % of GDP, accounting gimmicks stock options, stock issuance, low dividend yield, so many stuffs all this mortals at moneylife didn't calcuate.

    now what could be the peak ratio for india corporates compared to GDP????

    Isn't that's why buffett is richer then them 🙂

    RJ yesterday talked about multi decade bull run,

  • Deepak Shenoy says:

    >Anon: Check buffett's presentation. In 1999 he said the only two reasons he would invest is if a) interest rates fell and b) if corporate profits grew > 6%. Note this carefully: Interest rates DID fall, and are low even now. Corporate profits from 1999 have grown beyond 6% (Fortune 500) Buffett was right that it was a bad time to invest, but his reasons were all wrong.

    Also: the stock options problem exists in India even today. Low div. yield has always been a problem here. We are at the reverse of the US – our GDP has grown much much faster than our corporates (which is true of the last four years).

    At the rate inflation is going, the multi-decade bull run will be required to just have our money retain the same value 😉

  • Anonymous says:

    >Yes he was wrong about many things.

    Okay i looked up that he was wrong about interest rate, not sure about Profit as % GDP in competitive world it can't increase above peak level logically speaking, can you point a recent data or link.

    Cause every company, product has competition and if the profit margin is high many new competitor come along and US has many giant corporations so the profit margin stays capped.

    Do recall that the prediction was made in Dec 1999 he might have changed the stance when the int rate dropped.

    There is also valuation of stocks to be considered too US stocks where quoting at god forsaken PE at height of bull market and it takes years for earning to catch up to the valuations plus companies usually do mindless diversification in bull market and close up many ventures afterwards. Many companies like enron, worldcom, and many other had accounting gimmicks, cisco was lending its customer to buy its products etc etc. so many accounting gimmicks to show net profit.

    Since i am at level below the level of mortals at Moneylife i would like to stop discussion here.
    I would rather listen to RJ, Sameer Arora, Nemis shah and what they think about the market then the moneylife guy.

    Most of things become clear to me only in the hindsight like what if i had bought glodyne, or edserv in march 2009 :)) my whole net worth in kwality dairy …………..hehehe i dream about that a lot.

  • Deepak Shenoy says:

    >Anon: From the FOrtune 500 site, Fortune 500 profits went from 409B in 2000 to 786B in 2006, a 11% compounded growth rate. Even nominally, GDP of the US didn't grow 11% – I think the max it grew was like 6%.

    http://money.cnn.com/magazines/fortune/

    My point is: don't blindly follow anyone, whether it's RJ or Buffett. People don't often do what they say. People often are wrong and know when to change track when they are wrong, but they will not come and tell you they changed track. Hindsight is always 20/20.