Monday, April 1, 2013

Market Value of Equities/GNP vs. Market Value of Equities/GDP, Both Look Overvalued (Charts)

In my previous post on how overvalued equities look relative to GDP on a historical basis (post World War 2), a commenter made a good point that GDP doesn't factor in overseas profits, so he thought MVE/GDP wasn't really relevant in this case. But, when looking at the market value of equities relative to GNP (Gross National Product), which factors in U.S. corporate profits overseas, there wasn't really much of a difference. Actually, both ratios look like they need to be cut in half!


Market Value of Equities/GNP

source: St. Louis Fed's FRED

Market Value of Equities/GDP

source: St. Louis FED's FRED

Market Value of Equities/GNP vs. Market Value of Equities/GDP

source: St. Louis Fed's FRED


For reference, here's how Wikipedia defines GDP and GDP:

"GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country."

"GDP measures the total output produced within a country's borders - whether produced by that country's own local firms or by foreign firms."

Also, it appears that Warren Buffett is a big fan of the Market Value of Equities/GNP ratio. According to Greenbackd, Buffett said "it is probably the best single measure of where valuations stand at any given moment." And read "Where Are We With Market Valuations?" at GuruFocus.

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