Perspective on GDP

The last time the S&P was in the 680s (as the futures are trading right now), the nominal GDP was 7.86T (September 1996).

Right now, nominal GDP is almost double at 14.2T. If you chop off 10% from peak nominal GDP of q3 2008 of 14.4T, we end up with 12.9T as the trough. 20% off = 11.5T. Still quite a far way from 7.86T, especially considering you only need 10% to formally dip into a "lowercase" depression.

The Great Depression peak to trough witnessed a 45% decline in GDP. An equal fall in GDP (Great Depression "2"), would result in nominal GDP at 7.76T, right about where we see the S&P has already found its way to.

If the GDP shrunk almost 45% from here, we'd have a fairly valued S&P at these prices. I'd like to think size of GDP somehow correlates to long term residual earnings power of the market.

Comments

[CautiousInv...:]

There are indeed relationships between GDP and corporate profits; it is not constant, however. After-tax corporate profits equaled 10.1 percent of gross domestic product in the first nine months of 2006.

In the 80 some years the Commerce Department's Bureau of Economic Analysis has been measuring them, profits never even hit 9 percent of GDP before 2005. Somewhat ominously, they came closest in 1929 - at 8.9 percent of GDP.

A concern is that effective corporate tax rates have been declining while at the same time finanacial leverage has been increasing; both helped to increase corporate profits to recent peaks. Looking forward, I see both of these developments being reversed.

Mar 04 05:37 AM

[Steven Hansen:]

ask yourself simple questions

- if the profit and loss of your stocks transactions included in the gdp?

- is banking included in the gdp?

- is buying or selling houses in gdp, or any other asset for that matter unless it is a new build?

the fact is gdp is only indirectly related to equities, and although a comparison is interesting - it is meaningless. especially today when the country is service based, and not industrial based.

Mar 04 05:39 AM

[Dave Wrixon:]

GDP itself is largely meaningless.

The US obsesses with it. Probably not least because it flatters a consumer based economy.

Mar 04 05:47 AM

[socrateazz:]

Remember who the leader is! Castro is a hero. What happened to Cuba's economy? AND ...... There is nobody to coverup such mistakes. At least when Cuba went into the pits, There were other areas where economies flourished and sent wealth! I think Nero and Obama have somethings in common. Both took actions. Both were relatively good speakers. both had egos which covered belief over reality. In a way Obama is similar to Lincoln. Lincoln forced a war he thought he could win quickly. Obama is forcing a change in an economy that he thinks will ultimately be beneficial. I understand people. They will not be peons without force! I wonder how much human loss will be associated with Obama's Leadership. I hope the Civil war continues to be the worst. I am not sure

Mar 04 07:17 AM

[Fred Voetsch:]

The arguement made by the author is a foolish and dangerous one because he takes one little bit of data, without nearly enough supporting data, and uses it to come to a conclusion.

Larry? Larry Kudlow, is that you? :-)

Mar 04 12:43 PM