Market Cap as a % of GDP

Here’s a brutal quote from Charles Allmon of the Growth Stock Outlook. I haven’t fisked the numbers, but my gut reaction is they appear sound.

“Market capitalization as a percentage of GDP is one of the few reliable measures of over- or undervaluation. We saw gross overvaluations in 1929 at 87 percent and in 2000 at 172 percent. Today? We’re looking at 106 percent — far higher than the 57 percent norm of the past 75 years and exceeded only by the absurd valuation of 2000. These data cannot be fudged to make the current bullish case. As I have stated repeatedly, this market is not cheap. Momentum was the name of the game in 2003. Forget value. Unfortunately, this is the type of market which crucifies investors.”

Note that this method of valuation does not run into the same issue that a simple P/E analysis does: High P/Es at an early stage of recovery are not necessarily bad (especially given ultra low inerest rates). With companies running so lean — little debt, tight inventory and no excess staff — it doesn’t take much of an increase in revenues to see a big increase in earnings. In a genuine recovery cycle, you can have high P/Es, and grow into them. Think of Nokia’s recent numbers as an example — raising guidance lowers PE — sometimes dramaitically.

But Allmon’s methodology isn’t reliant on P/Es. That’s what maks it so scary . . .

Washington Post
Sunday, January 11, 2004; Page F10

What's been said:

Discussions found on the web:
  1. Anon commented on Jan 13

    Just be careful — Charles Allmon has been Bearish since 1982 . . .

  2. Different Opinion commented on Jan 14

    Tobin’s Q and Market Cap to GDP

    …Market capitalization as a percentage of GDP is one of the few reliable measures of over- or undervaluation.”

    …if that claim holds true, Tobin’s Q has to be added to those

  3. Deene W. Lindsey commented on Jan 14


    A few quick comments on Allmon:

    1. “Anon” was being kind — Charles Allmon has been simply and embarassingly wrong on the market for two decades, and his investment performance is poor.

    2. If your time horizon is a quarter or less, valuation is simply not a useful tool…but there is no “bright line” in time past which it _is_ useful. In short, “Markets can remain irrational longer than you can remain solvent.” — J.M. Keynes

    3. Most importantly: Market cap as a % of GDP is a completely useless statistic. Since 1929 there has been a sea change in the source of capital provided to corporations: from banks to bonds to…equity. So, rising market cap as a % gdp reflects both valuation _and_ a change in financing; Mr Allmon seems unaware of the distinction. Actually, it is _good_ that market cap rises as a % of gdp, since that source of capital is not “callable” in a crisis.

    4. I still owe you a cd for a few “Worms” tracks.


  4. david foster commented on Jan 17

    The point about shifts from debt to equity financing is a good one..but this could be compensated for by using “enterprise value” (debt + market cap) in the calculation instead of pure market cap. Wonder if he’s done this.

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