We often hear that, over the long term, the stock market expands continuously. And, truly, market capitalization (the market value of all tradable stock shares) is at an all-time high. In fact, it continually breaks its own records. Why? (1) This valuation is nominal, and inflation increases the value without any change in the fundamentals. (2) The economy is growing and along with it grows the value of traded companies. (3) The share of the economy’s output produced by these publicly traded companies is increasing. The first two points seem pretty obvious, but the third one is illuminated by the graph above.
The blue line shows the ratio of market capitalization to nominal GDP, so the effects of (1) and (2) are isolated. That leaves (3), the increasing contributions of traded companies, that must account for this persistent rise in the stock market.
The red line shows the ratio of the value of all shares traded during a year to yearly GDP—that is, all the output during that year. The traded value is increasing more than proportionally. In fact, a share is traded on average more than once per year since 1999, the point when the two lines cross.
How this graph was created: Search for “stock market GDP United States” and the first two choices should be the series you want. Select them and click on “Add to Graph.”
Suggested by Christian Zimmermann.