Market Cap To GDP: The Buffett Valuation Indicator

by: Doug Short

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."

My friend and guest contributor Chris Turner offered some analysis along those lines last year using the S&P 500 as the surrogate for the market (When Warren Buffett Talks … People Listen). For a broader measure of Market Cap, uses line 36 in the Federal Reserve's B.102 balance sheet (Market Value of Equities Outstanding) as the numerator. Since both GDP and the Fed's data are quarterly, the folks at do some interpolation and extrapolation to produce monthly estimates. Their latest chart is available to the general public here.

The four valuation indicators I track in my monthly valuation overview offer a long-term perspective of well over a century. The raw data for the "Buffett indicator" only goes back as far as the middle of the 20th century. Quarterly GDP dates from 1947, and the Fed's B.102 balance sheet has quarterly updates beginning in Q4 1951. With an acknowledgement of this abbreviated timeframe, let's take a look at the plain vanilla quarterly ratio with no effort to interpolate monthly data or extrapolate since the end of the most recent quarterly numbers.

The strange numerator in the chart title, MVEONWMVBSNNCB, is the FRED designation for Line 36 in the B.102 balance sheet (Market Value of Equities Outstanding), available on the Federal Reserve website. Here is a link to a FRED version of the chart. Incidentally, the numerator is the same series used for a simple calculation of the Q Ratio valuation indicator.

Unfortunately, the "market cap" numerator is rather stale. The Fed won't publish the Q1 data until June 5th.

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For a version that's current through Q1, I can offer a more transparent alternate snapshot over a shorter timeframe. Here is the Wilshire 5000 Full Cap Price Index divided by GDP. I've used the FRED data for the stock index numerator (WILL5000PRFC).

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A quick technical note: To match the quarterly intervals of GDP, for the Wilshire data I've used the quarterly average of daily closes rather than quarterly closes (slightly smoothing the volatility).

What Do These Charts Tell Us?

In a recent CNBC interview (April 23rd), Warren Buffett expressed his view that stocks aren't "too frothy." However, both the "Buffett Index" and the Wilshire 5000 variant suggest that today's market is indeed at lofty valuations, now above the housing-bubble peak in 2007. In fact, the more timely of the two (Wilshire / GDP) has risen for seven consecutive quarters and is now approaching two standard deviations above its mean - a level exceeded for six quarters during the bubble.