Global GDP, Stocks versus Global GDP, and the U.S. economy versus the World, China, and Japan

The world is bigger than just the United States (surprise, surprise...)

The other day, we looked at the stock market versus U.S. GDP and that metric suggested some scary valuation levels.

But…even though many companies in the S&P 500 are U.S. companies, many of them have a global presence. And, global GDP looks a bit different (and bigger) than U.S. GDP:

That’s right - believe it or not, the world economy is bigger than the U.S. (which may come as a shocking surprise to many of us provincial Americans).

In fact, over the last sixty years, the U.S. has had a declining share of the global economy:

So, maybe it makes sense then to compare the mostly U.S. based (but globally operating) S&P 500 companies to global GDP and see what that looks like:

It’s still at extreme levels but it isn’t nearly as bad as when compared to just U.S. GDP!

That being said, if the U.S. is shrinking as a share of the global economy, who is growing? China is the obvious answer here and this is how China compares in size to the U.S. economy:

Now, it’s been a very common story for over a decade to hear how China is going to overtake the U.S. economy. But, China is not the first challenger to come along in the last sixty years. Check out Japan:

Japan’s economy peaked at 70% the size of the U.S., which is crazy! China is just about at 70% now but their gains have slowed in recent years. It’s very likely they will cross 70% and beat out Japan’s run but…long term? Who knows! There could very likely be problems that stifle China’s progress as compared to the U.S. economy.

Likewise, the U.S. could have problems that slow our comparative advantage versus China, so it’s a two-way street. I guess we will have to check back in on this one in about ten years to see what happened, so set a reminder on your calendar!

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Checking in on Crypto Mania

Bitcoin, Ethereum, and Litecoin

Bitcoin is making a serious push toward a new all-time high. If successful, there could be another leg up:

Ethereum is in the same boat:

However, despite the hype on Ethereum overtaking Bitcoin in price, it still has a long way to go:

And, my favorite “forgotten” cryptocurrency, one of the early players Litecoin, is still hanging in there:

But it is a sad story when compared to Bitcoin:

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Sixty Years of Stocks and GDP

It's looking a little crazy out there

Here is the S&P 500:

And, here is GDP:

If you divide the first chart by the second chart, you get a stock market valuation metric - essentially, how stocks are valued versus the underlying economy. Currently, that metric is at the highest it has been in sixty years:

Now, the S&P 500 is just an index and we are dividing it by a dollar value for domestic production so that may not seem quite right. Fortunately, the Wilshire 5000 has an index that uses a dollar market capitalization for the entire U.S. stock market:

And…we see the exact same thing here:

In terms of this metric, we are far into new territory we haven’t seen in more than sixty years. Stock valuation, by this measure, is at an extreme level. If that isn’t a good spooky story for October then you are certainly braver than I am!

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Job Market Update

Continued strength for job seekers

The job market has been in positive territory lately but…not by much the last two months:

Meanwhile, job openings continue to skyrocket:

And, the unemployment rate continues to claw its way back to a pre-pandemic level:

Meanwhile, the number of people who continue to claim unemployment has flattened out:

And, the number of people starting up on unemployment remains relatively low:

Putting it all together, it remains a good time to be a job seeker. The narrative of trouble hiring and finding good job candidates will likely continue, especially as unemployment metrics tighten and labor demand grows through the economy recovery / normalization.

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Stock Market Bake Off! Featuring Apple, Google, Facebook, Amazon, and Microsoft

Who will take first place?

Let’s have some fun today.

Imagine you are looking to invest some money into a good company and someone says, “you should check out some of those big tech companies that have done so well.”

You do some research and like a lot of the names you see but are ultimately down to Apple, Google (or Alphabet for all you corporate naming purists), Facebook, Amazon, and Microsoft. Instead of just spreading out your investment you want to keep it simple and choose just one stock - ideally, the best one! But…how?

There are a lot of ways to choose a stock and there is no right way or best way. Some people just like the name of a company or a product, invest, and outperform the very best investors who spend their professional lives researching good stocks.

Instead of throwing darts at a dartboard and hoping for the best, you want to do at least a little bit of research to feel more comfortable. You know each of the five companies well enough from daily life and the news, so you feel fine from a qualitative perspective. Now, you want to do some quantitative analysis and choose five popular metrics to compare the five stocks:

  1. Price-to-Earnings to assess valuation

  2. Return on Equity to assess return on capital

  3. Gross Margin to assess profitability

  4. Net Profit Margin to also assess profitability

  5. Debt-to-Equity to assess leverage

You don’t want to make things complicated here, so you decide to just use a basic scoring system. If a stock has the best metric for a given comparison, they get five points. Second place gets four points and so on down to last place, which gets one point. With that approach in place, the bake off begins:

Starting with valuation, it’s a tight race between Apple, Google, and Facebook but Amazon is just way behind. After round one, the score stands as follows:

  • Apple: 3 points

  • Google: 4 points

  • Facebook: 5 points (Leader)

  • Amazon: 1 point

  • Microsoft: 4 points

Apple is the clear winner on this one! Now the score stands:

  • Apple: 8 points (Tied Leader)

  • Google: 5 points

  • Facebook: 8 points (Tied Leader)

  • Amazon: 3 points

  • Microsoft: 6 points

Round three shows Facebook with another knock-out punch and Amazon barely hanging on!

  • Apple: 10 points

  • Google: 8 points

  • Facebook: 13 points (Leader)

  • Amazon: 4 points

  • Microsoft: 10 points

Once again, Facebook demolishes profitability. It’s starting to be a blow out!

  • Apple: 12 points

  • Google: 11 points

  • Facebook: 18 points (Leader)

  • Amazon: 5 points

  • Microsoft: 14 points

In the final round, Facebook once again crushes the competition. And, thus, we have our final tally:

Facebook wins the bake off! Steady performer Microsoft (no wins or losses) comes in second. Google takes third and strong starter Apple fizzles down the stretch to take fourth. Amazon, which had three last place finishes and two fourth place finishes, unsurprisingly comes in last.

After the bake off, maybe you feel comfortable picking a stock to invest in. Or, maybe not! Just because this is some analysis with numbers doesn’t mean we found the best stock. But, it certainly helps shed some surprising new insights on the competition (for example, I wouldn’t have expected Amazon to do so poorly).

At the end of the day, this is just one fun approach to comparing some potential candidates. Best of all, it’s a quick-and-easy recipe and you can easily substitute the ingredient metrics to tailor things even more to your liking!

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