Probably the broadest measure for stock market valuation purposes is total stock market capitalization divided by GDP. Warren Buffett uses it and John Hussman has spoken approvingly of the measure.
But because we have to wait for GDP numbers for at least a month after the quarter end, the ratio cannot be a real-time valuation tool. And given that revisions to GDP can be substantial in the 2nd and 3rd estimates, as well as in the annual summer revisions, precision using the 1st estimate is also wanting. Nevertheless the calculation provides a big picture snapshot of where we have been in the market cycle, and gives forward guidance for long term investors. Presently it appears to counsel taking chips off the table and waiting in cash for a better opportunity to invest.
For the following I use nominal figures for GDP as revised in the most recent updates from bea.gov and calculate market cap using the popular Wilshire 5000 (level x $1.2 billion) as close to March 31 as practicable.
A comparison of March 2009 to March 2014 is instructive, since March 2009 was a pretty good buying opportunity both in terms of the absolute level of the stock market after its decline and the coincident Shiller p/e valuation which was about 13.3 on March 1. The ratio has almost doubled in the interim, indicating that now is probably not a good time to commit large new sums to stock markets. The current Shiller p/e begins the day at 26.31, which is also nearly doubled from five years ago.
That said, the 10 year Treasury presently pays just 69 basis points more than the dividend yield of the S&P500. At the October 2007 stock market high, the 10 year Treasury paid 276 basis points more than the dividend yield of the S&P500. You could argue the Fed caused the markets to crash by taking rates much too high in 2006 and 2007 and that Janet Yellen is bound and determined not to let that happen again anytime soon, meaning stock markets could have higher to go. Keep in mind that the inflation-adjusted all-time high of the S&P500 was 2045.09 on August 1, 2000. We're at 1962.46 this morning.
March 30 2009
$10.32 trillion market cap
---------------------------------------------- = 0.72
$14.38 trillion GDP
March 31 2014
$23.99 trillion market cap
---------------------------------------------- = 1.41
$17.02 trillion GDP
