Some look at the "Market capitalization-to-GDP ratio" (also known as the "Buffett Indicator", since Warren Buffett mentioned it before) as a valuation metric.
Aside from that, some say that government spending and the Fed balance sheet have some influence on equity prices.
In order to incorporate all of the above, I did a calculation, dividing the Wilshire 5000 by the sum of GDP, federal debt, and the Fed balance sheet. Here are the results for the past 19 years (2002 - 2020):
Code: Select all
Key:
wilsh = Wilshire 5000 (https://finance.yahoo.com/quote/%5EW5000/history)
gdp = U.S. GDP (https://fred.stlouisfed.org/series/GDP)
bal = Federal Reserve balance sheet (https://fred.stlouisfed.org/series/WALCL)
debt = U.S. Federal debt (https://fred.stlouisfed.org/series/GFDEBTN)
denom = denominator (gdp + bal + debt)
gdp% = percentage contribution of GDP to denominator
ratio = wilsh / denom
All figures in denominator are in billions of USD.
All figures are year-end figures.
Results:
year wilsh gdp bal debt denom gdp% ratio
2002 8343 11061 732 6405 18198 61% 46%
2003 10799 11772 771 6997 19540 60% 55%
2004 11971 12527 810 7596 20933 60% 57%
2005 12517 13324 847 8170 22341 60% 56%
2006 14257 14039 869 8680 23588 60% 60%
2007 14819 14715 890 9229 24834 59% 60%
2008 9087 14608 2239 10699 27546 53% 33%
2009 11548 14651 2234 12311 29196 50% 40%
2010 13360 15309 2420 14025 31754 48% 42%
2011 13189 15842 2926 15222 33990 47% 39%
2012 14995 16420 2907 16432 35759 46% 42%
2013 19706 17133 4032 17156 38321 45% 51%
2014 21669 17852 4497 18141 40490 44% 54%
2015 21167 18332 4486 18922 41740 44% 51%
2016 23425 18968 4451 19976 43395 44% 54%
2017 27794 19882 4448 20492 44822 44% 62%
2018 25749 20813 4075 21974 46862 44% 55%
2019 32886 21694 4165 23201 49060 44% 67%
2020 39456 21477 7363 27747 56587 38% 70%
1. Most of the ratio figures (14 out of 19) are in the range of 40 to 60. The average is 52. The median is 54.
2. The contribution of GDP to the denominator had stabilized for several years at 60%, then later stabilized again for several more years at 44%. Also, this number seems to go only one direction (down).
My question is, does this calculation provide a better assessment of valuation than the unmodified "Buffett Indicator"?
Please note that I'm not claiming this to be the new be-all end-all indicator. It's just an experiment.
Please also note that I'm not asking or asserting anything about the future (e.g., predictive value). While some may want to use it in that way, others may simply want to gain a better understanding of equity pricing.