Stock Market Capitalization To GDP Ratio

Joey’s been asking people how they’re doing for years, but today, he’s going to ask a different question. Today, he wants to know how the stock market is doing. And to answer that question, he’s going to look at something called the “stock market capitalization-to-GDP ratio.”

As its name implies, this ratio uses stock market capitalization and a nation’s gross domestic product, or GDP, to assess whether a particular market is overvalued, undervalued, or, like Goldilocks, valued juuuuust right.

Here’s how it works: we pick a stock market, any stock market. Could be the European market. Could be the U.S. market. Could be the global market as a whole. We take that stock market’s total capitalization and we divide it by the same market’s GDP. Then we multiply that number by 100, and voila: we’ve got ourselves a stock market capitalization-to-GDP ratio. If the number is above 100%, that generally means the market is overvalued. If it’s below 50%, it's generally an indication that it’s undervalued. We say “generally” because the experts disagree on where the lines between undervalued, appropriately-valued, and overvalued are. But if we compare this ratio to a market’s historical averages, we can get a picture of whether that particular market is trending upward, downward, or just staying put.