Market valuation is a regular subject on this website, so I was particularly struck by this item from The Chart Store featured on Barry Ritholz's Big Picture.

 

 

The notes explain the valuation methodology, which is essentially the market capitalization as a percent of GDP. When I saw this chart, I was immediately reminded of the Q Ratio series that I update monthly. (Note that the chart above begins in 1924, the chart below in 1900, so the overlap is not perfect.)

 

 

The first wave of Baby Boomers was turning 50 in 1996 when the valuations in the two charts began soaring into the stratosphere. They were entering their peak earning years at roughly the same time that the Tech Bubble began inflating in earnest. Now the oldest Boomers have begun turning 65. The United States is entering a slow-motion demographic shift at a time when Federal, State and Local governments are dealing with financial issues unprecedented in living memory.

Many analysts dismiss the apparent market overvaluation implied by charts such as these. Their explanations are various and perhaps to some extent valid. "The Q Ratio doesn't adjust for the growth of intangible assets; we're living in a new era of business efficiency driven by advances in information technology; markets are far more international, etc."

On the other hand, the U.S. is entering a period when the aging population will begin withdrawing from their investment accounts and the payouts from Social Security and pensions (state, local, and private) will begin to accelerate.

Eventually we will find out if the 1990s shift in valuations was a permanent change or a reversion to historic valuations lies ahead.

 

 

(c) Doug Short

www.dshort.com