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The ratio of Total Market Cap to US GDP is an economic indicator measure that tells us whether the stock market valuation is overvalued, undervalued or fairly valued. Warren Buffet once said that the percentage of total market cap to US GNP is the "best single measure" for stock market valuation. GNP and GDP are different measures but the numbers are almost the same and therefore it doesn't make much difference to use the GDP instead of the GNP.
The ratio is calculated by dividing the total US stock market capitalization by the Gross Domestic Product. It can be interpreted as follow:
A ratio lower than 50% indicates that the market is significantly undervalued
A value between 50% and 75% means that the market is modestly undervalued
A value between 75% and 90% means that the market is fairly valued.
A value between 90% and 115% means that the market is modestly overvalued.
A ratio higher than 115% indicates that the market is significantly overvalued.
The indicator name is "Ratio_GDP_Cap" and it requires two other trading objects: Gross Domestic Product - Historical data is used to download Gross Domestic Product data. The object downloads historical data of the GPD and creates the following ticker symbol: ^GDP. Wilshire Indices - Wilshire 5000 Index gets several Wilshire Indices, including the Wilshire 5000 Total Market Index, which is used by this indicator as a measure of the total US market capitalization.
This market valuation ratio simply divides the US total market capitalization by the Gross Domestic Product.
Trading financial instruments, including foreign exchange on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in financial instruments or foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.
