$20 Trillion+

February 17, 2017

This week the stock market continued its impressive bull market run with the S&P 500 crossing a milestone level -- a market capitalization of $20 Trillion. While most of the market participants took this as a positive sign, it reminded me of one of the most reliable predictors of long-term (10-year +) market returns -- the Market Capitalization to GDP ratio. This is also known as the "Buffett Indicator" as Warren Buffett cited it as the best indicator of market attractiveness.


The concept, like most of the "Oracle of Omaha's" investment theories, is quite simple and based on economic logic. It is mathematically impossible for the stock market to be worth more than the underlying economy for a prolonged period of time. The DATA supports this wisdom and is actually one of the stronger "fits" when it comes to regressions between valuation metrics and long-term returns (the R-squared is an impressive 82%)

Like all valuation metrics, the simple fact the market is overvalued does not mean it will go down immediately. It does mean long-term investors should be cautious putting new money to work at these levels.


A side note - The Wilshire 5000, which represents the largest 5000 US based stocks is worth $22 Trillion and is commonly used to represent the overall US market capitalization. The fact the S&P 500, which is the largest 500 stocks is $20 Trillion of the $22 Trillion is evidence of how narrow the overall market rally has been. Again, this by itself is not a "sell" signal, but another warning of the risks in the market right now.

Please reload

Web and Internet news concept with rss f
Featured Posts

Investment Grade Junk

September 11, 2019

Please reload

Recent Posts

January 29, 2020

December 10, 2019

Please reload

  • LinkedIn Social Icon
  • Twitter Social Icon
  • Facebook Social Icon
  • RSS Social Icon

Related Posts

Please reload

© 2016-20 Strategic Equity Management, Inc. dba SEM Wealth Management. Site created by Courtney Hybiak.

This site is for INFORMATIONAL PURPOSES ONLY.  The comments and posts published in the SEM Trader's Blog ARE NOT investment recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.  CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute

Investing in the stock or bond markets involves risk and may not be suitable for all investors. Before making any investment decisions you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists you could sustain a loss of some or all of your initial investment and therefore you should not invest money you cannot afford to lose. You should be aware of all the risks associated with your investments and seek advice from an independent financial advisor if you have any doubts. All investments involve risk including those managed by SEM Wealth Management.

Opinions expressed at www.stratequity.com, www.semwealth.com and semtradersblog.com or the previous Trader's Blog site are those of the individual authors and do not necessarily represent the opinion of SEM Wealth Management or its management. Any opinions, news, research, analysis, prices or other information contained on this website, by SEM, its employees, partners or contributors, is provided as general market commentary and does not constitute investment advice. SEM will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.


The use of this website constitutes acceptance of our user agreement. Past performance is NOT indicative of future results.

***Anywhere performance of SEM's Investment Models is used, please refer to our Performance Snapshot  which contains details of the performance calculations for each of our investment models.***


There is no representation made as to the future results of SEM’s programs or if they will be profitable.

For additional information on the author and SEM Wealth Management, please see our DISCLOSURE DOCUMENT (ADV Part 2).