Market Cap to GDP: Buffett Valuation Indicator
Note: This update incorporates the Q3 GDP Advance Estimate and the September close data. Please note that this update follows GDP releases, which always lag.
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."
The four valuation indicators we track in our 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 balance sheet has quarterly updates beginning in Q4 1951. With an acknowledgment of this abbreviated timeframe, let's take a look at the plain vanilla quarterly ratio with no effort to interpolate monthly data.
The strange numerator in the chart title, NCBEILQ027S, is the FRED designation for Line 62 in the F.103 balance sheet of Table S.5.q of the 'Integrated Macroeconomic Accounts for the United States' (Market Value of Equities Outstanding), available on the Federal Reserve website. Incidentally, the numerator is the same series used for a simple calculation of the Q Ratio valuation indicator.