In 2001, Warren Buffett wrote an
article in Fortune. Among other things, he discussed the relationship between GNP and the market cap of domestically traded companies in terms of when stocks in general are good investments:
"Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country's business--that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know.
Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.
For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won't happen.
For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire. As you can see, the ratio was recently 133%."
Currently,
GDP and the
market cap of the Wilshire 5000 (basically all publicly traded domestic companies) are both slightly more than $14 Trillion.
So, that relationship Buffett wrote about is now 1:1. In 1999, market cap was at a 2:1 ratio to GDP. By 2001, it was 1.3:1. Now it's 1:1. According to Buffett's review of 80 years of history (and I don't have the chart he mentioned, unfortunately), market cap has to fall to 70-80% of GDP before stocks in general are a screaming buy.
In other words, we have a ways to go.