The US stock market is far and away the largest in the world. It's total market capitalization is estimated at close to $55 Trillion dollars. That represents about 40% of the total global stock market. Japan and China’s markets are the next largest, each at about 7.5%. Even though the US share of the global market has decreased over the years, at home it continues to increase as a percent of the nation’s gross domestic product. GDP is a measurement of a country’s economic output.
The relationship between annual GDP and the value of the stock market is sometimes referred to as the Buffet Indicator, named after Warren Buffet, who first postulated the concept. Currently, the ratio stands at about 229% which is well above the historical trend line of 120%. Some would point to this and say that the market is overvalued. But there are many things to consider here.
First, because interest rates have been so low for so long it makes stocks look cheap. Because your bank account and bonds are paying next to nothing in interest, stocks look like the only game in town. This has driven the demand for equities higher.
What the Buffett ratio is really saying is that the stock market makes up a larger portion of GDP today than it did generations ago. To me this seems obvious. We are all aware of the uncomfortable fact that big business has been making it harder and harder for small local businesses to flourish. Two generations ago it was not common for American citizens to transact with a publicly traded company on a regular basis. Other than utility companies like AT&T or energy like Exxon, people did not buy regular, reoccurring goods and services from mega corporations. Today, the biggest differences are in the retail and technology sectors.
When someone buys a stock, they are technically submitting a “bid”. (You submit an “ask” is you are selling). Today, there is what is know as the “relentless-bid”. These equity purchases are done like clockwork every week in the form of 401(k) contributions. Generations ago, it was rare to have a retirement plan unless you worked for a large corporation. Today, small businesses have the 401(K) and other less administratively taxing options. Many states across the country are now even considering having auto-enroll IRAs for workers whose employers don’t have retirement plans. Some states like California, Illinois and Oregon already have their plans up and running.
Consumers today pay corporations not only with money but with personal data; think of stocks like Facebook, Google, and Twitter. These companies offer services and products that are “free” to the public. Instead, your consumer behavior is now used to compensate these firms. This is a fact that cannot be overstated. Since the start of the 21st century a new commodity has been tapped and turned into profits: your data.
The reason the stock market has gotten so big is because so many of these corporations have their “hands” directly in our pockets. Many are now launching buy-now-pay-later programs or interest free loans for purchases. It used to be solely credit card companies syphoning your income from your bank account. Now Amazon and Walmart are getting into the fray.