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It’s time to be very discerning about investments. The total market capitalization-to-GDP ratio is at 125%, only below the peak of the 1999 bubble. At the same time, companies are increasingly delaying their IPOs, which has a depressing effect on the total market capitalization part of the equation.
Horizon Kinetics just published its first-quarter investment commentary, which contained, among other gems, this paragraph (emphasis added):
The combined market value of all U.S. stocks, as measured by the Federal Reserve, is now near the 2nd highest on record. At 125% of GDP as of October 2016, it was just below the level reached in early 2000, the peak of the Internet Bubble. If one considers the market’s appreciation since October 2016, the ratio may have exceeded the 2000 level.
The Wilshire 5000 Total Market Index is indeed up strongly since the end of October. I’m sure GDP has not kept pace:
Source: ^WI5000TM data by YCharts
it is probably the best single measure of where valuations stand at any given moment.
(Read “Buffett Wary If Ratio Market Value Of Stocks Greater Than 100% Of GDP.”) I don’t like viewing the stock market through a single metric lens. But it’s overvalued by other metrics as well (read “Why ValueAct Is Returning Capital“). Even if multiple metrics point to overvaluation, we need to be careful with conclusions and potential actions. Often, these metrics are closely related.
The case is made stronger because of an obvious cause for mispricing, which can be found in ETF inflows. This was most recently discussed in “Are ETFs The New Weapons Of Mass Destruction?”
What Horizon Kinetic’s highlighting of the stock-market-to-GDP ratio immediately reminded me of is something from a McKinsey article explaining how and why venture capital funded companies are increasingly staying private longer:
That trend is taking down the market cap part of the equation in Buffett’s favorite indicator. Together with the appreciation since October, it could well mean the stock market is setting a record high currently.
Let me go back to Horizon Kinetics’ quarterly commentary for a second (emphasis added):
To suggest that this will iron out over time, irrespective of valuation, is a spurious interpretation of indexation. Today, just over 17 years after the Internet Bubble peak in March 2000, and after an 8-year bull market, the S&P 500 returned 4.7% a year. The SPDR S&P 500 ETF returned 2.7%, the difference largely due to the frictional costs of trading. And those results, such as they are, only pertain if everybody stayed in, which they didn’t.
If you start buying at peak valuations, it can really hurt long-term performance. I mean, 2.7% over 16 years…
With the stock market at a possible record peak exceeding the dot-com bubble, I don’t think now is the worst point in time to look long and hard for opportunities that are perhaps not as directly dependent on the direction of the market, and/or to venture outside of the ETF universe — which is potentially to blame for the fresh record.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.