Stock Market Capitalization As A Percentage of GDP

Last week I made the proposal that although the stock market will likely trade in 30 to 50% broad up and down ranges, that in all likelihood  the stock market will be at similar prices 12 to 15 years from now as they are now. It has happened regularly in the past , occurring  in the period from 1929 to 1954, and from 1966 to 1982. Both of these flat periods occurred after incredible market run ups and subsequent busts. 

One way to measure the "madness" is to measure the value of the stock market's overall capitalization to the size of the national Gross Domestic Product. Historically the stock market value has been about 58% of GDP. Lows were in the range of 37% in the early 1950s, and 25% at the bottom of the Great Depression. Highs in this measurement were around 75% and occurred at all the important market turning points in the last 80 years including 1929 and 1966.  As recently as 1991, the market was at the historic 58% level of GDP. 

Since 1991, all semblance to reality began to be  lost in this particular measurement. By the 4th quarter of 1999 stock market capitalization had increased to an atmospheric and unprecedented 185% of total GDP! Even today in spite of a huge bear market, the rate is still a stratospheric  104%!

If the economy were to grow at a healthy and optimistic 4% a year for the next 18 years, it would bring our index back to the 50% range. That is... if the market was at the same level as the current price level at that time! For the future, a strong argument can be made for a prolonged period of broad based market movements moving around the flat line. This is what happened in both the 1930s and 1970s. 

All of this should bode well for the market participants who practice timing in a systematic and methodical fashion as is advocated here in the Lussenheide Investment Warrior Report. 


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