S&P 500-to-GDP Ratio Shows Stocks Worth Buying: Chart of the Day

U.S. stocks look reasonably priced when the value of companies is measured against the size of the country’s economy, according to David R. Kotok, Cumberland Advisors Inc.’s chairman and chief investment officer.

The CHART OF THE DAY shows the comparison he made in a report two days ago: between the total market capitalization of companies in the Standard & Poor’s 500 Index and nominal gross domestic product, which isn’t adjusted for inflation. The chart displays monthly readings for the last 12 years.

Yesterday’s ratio was 83 percent, according to data compiled by Bloomberg. The gauge peaked at 101 percent in May 2007, near the end of a five-year bull market, and 131 percent in August 2000, when the Internet bubble of the 1990s had begun to burst. The earlier readings are circled in the chart.

“We are still two years away from a new high” for the S&P 500, Kotok wrote in the report. The prediction stems from the outlook for corporate profits and labor costs along with the index’s ratio to GDP, he wrote.

The S&P 500 may climb in 2014 to 1,600, which would lift the total market value of its companies to 90 percent of GDP, according to Kotok. His estimate for the index exceeds the record close of 1,565.15 on Oct. 9, 2007.

Cumberland’s equity accounts are “fully invested” in the market through exchange-traded funds, he wrote. He outlined the strategy used by his Sarasota, Florida-based investment firm in “From Bear to Bull With ETFs,” a book published this month.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net