Hacker News Reader

Comment by drclau | Hacker News Reader

> The stock market at 2x US GDP has concerned many for quite some time

Genuinely curious, since the stock market is global, can’t it be twice the US GDP without it being a significant problem?

View on HN

Depends what stock market you're talking about. The GDP is a flow-variable measure of how much money traded hands in a year in an economy (national). It's supposed to function as a measure of yearly production. The market cap of companies within the NYSE, LSE, etc are stock variables. Literally the sums of all the current trading prices times the number of outstanding shares of each company (roughly).

There's lots of noise in all those variables. i.e. You probably couldn't fully liquidate every stock of a company at the exact, same price in one transaction. Talking about GDP for a nation can be varying levels of politically manipulated or just noisy from messy data. There's further noise introduced when trying to figure out a GDP for something like the global economy.

i.e. taking a ratio of stock market cap to a GDP is more like creating a metric without too much intrinsic theory for why to create the metric.

People are betting US companies will outperform rest of the world by a huge margin, over the years US companies rely on huge influx of cheap money to sustain their growth. US stock market is propped up by a dozen of huge companies. About 75% of companies are valued below their 200 day average price, but you can’t see that looking at stock market. So what happens next is, growth of huge companies hits a wall. Take a look at Netflix price to get an idea how it looks like.

And as most of stock market is kept up by few companies, what happens if they start failing? US stock market crash.

Of course, that might happens soon, but it might be kept up for years. Bond yields are the key, they must not go down, not by a long shot.

Even if it was 10x US GDP and it was only US stocks, there wouldn't be an obvious reason why that's a problem. The GDP measures yearly output. Why is it concerning for the stock market to be priced at 10 years of output?

The stock market valuation is essentially how much money will trickle up to the owners in the future. If owners expects to extract 10 years of productivity then that is a huge red flag, basically means that working isn't valued and instead all the value goes to the asset owners instead of the workers. So you can see the valuation multiple as the tax workers pays to asset owners, high taxes are bad for the economy.

I don't know what you mean by significant problem. But the market is a bet on future global growth. If you can buy and hold (e.g. hold for 20-30 years in a retirement account) then I personally wouldn't worry. I'm still putting as much as I can in to my retirement which is 98% stock and 2% bonds (I'm in my early 30s).

Reply on news.ycombinator.com