Correlation: Total Stock Market Index Vs. GDP: How to Value Dow Jones

Today I learned about the Warren Buffet valuation of the stock market by looking at the total stock market index and GNP numbers (which is almost equal to GDP numbers + $200 billion).

The total stock market index can be found here and stands at $15.879 trillion on 15 February 2013 (Chart 1). It measures the market cap of the U.S. companies. Don't confuse this chart with the Dow Jones chart.

Chart 1: Dow Jones U.S. Total Stock Market Index

Now you compare that to the U.S. GDP number, which can be found here (Chart 2).

Chart 2: U.S. GDP

If you then divide Chart 1 by Chart 2, you get Chart 3. If the chart goes above 100%, then the stock market is overvalued.

Chart 3: Market Value to GNP ratio

Here is the table for valuation:

Chart 4: Valuation Table

For example, in December 2007, the GDP was $14.25 trillion, while the total market cap was $15 trillion. 15/14.25 = 105%. Meaning overvalued.

For example, in December 2008, the GDP was $14.08 trillion, while the total market cap was $8.78 trillion.
8.78/14.08 = 62%. Meaning severely undervalued.

So today, you could say that stocks are becoming overvalued, so you should take some of your money out of the stock market while you still can.

There is a final note I want to make. If this correlation is true between the Total Stock Market Index and GDP, then you have to take in mind that GDP is very important to watch. If the GDP drops, then the stock market will most likely drop. If the GDP rises, then the stock market will most likely rise.

I pointed out many times that U.S. GDP will not go up, due to the zero hour debt problem, which I talked about here. So theoretically, the stock market cannot rise.

The only way to get GDP go up again is when debt is significantly reduced and we're not at that point yet.