Question
The Wilshire GDP is a significant tool in evaluating market valuations as it provides a ratio between the market as a whole and national revenue. This ratio is calculated by taking the capitalization of the Wilshire 5000 stock market index and dividing it by the U.S. GDP. If the ratio is well below 100%, it indicates that the market as a whole is underpriced. Conversely, if it's well over 100%, it suggests that the market is overpriced. This index can help investors anticipate market crashes, as was the case in 2000 and 2008 when the index went over 100%.
This question was asked on:
Buffett says that the best measure of where valuations stand at any given moment is the ratio between the market as a whole and national revenue. The Federal Reserve Bank of St. Louis calculates one such ratio, colloquially known as the Wilshire GDP, which takes the capitalization of the Wilshire 5000 stock market index (i.e., how much the 5,000 companies in the index are worth) and divides it by the U.S. GDP. If the ratio is well below 100% then the market as a whole is underpriced; if it's well over 100% then the market is overpriced. The index went over 100% in 2000 and again in 2008, and each time the market subsequently crashed. As of late 2017 the Wilshire GDP stood at an historic high of 155%.
Receive new free presentations every Monday to your inbox.
Full content, complete versions — No credit card required.
