The Gross National Product has been growing without any slowdown except for a single major interruption in 2009. An unprecedented single 3.9% decline in GNP that year suggested that something could be amiss with the U.S. economic engine. Such a large annual decrease has never occurred before. Was it merely a temporary break that should in no way diminish the confidence of investors in better stock market returns in the future?
Market cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett (Trades, Portfolio). Back in 2001 he remarked in a Fortune magazine interview that the GDP “…is probably the best single measure of where share valuations stand at any given moment."
To check on Buffett’s valuation proxy we decided to examine the trends in historical GNP.
GNP growth rates since 1946 have fluctuated, with sharp declines in the annual rate alternating with sharp increases in subsequent years. Nevertheless, the aggregate trend has shown a steadily rising rate of growth through 1980. Some of such increase may be accounted by inflation though that cannot account for the average trend that is the result of year-to-year fluctuations in the recorded growth. The rising prosperity of the USA, accompanied by its global dominance, lifted the GNP for every investor as the foundation for their wealth.
The GNP trends since about 1980 offer a contrary picture. The growth trend shows a steady decline. That cannot be explained by a slowdown in inflation and certainly not by deflation. Most troubling is the sharp downward spike in 2008 without a prior comparable instance. There is no question that there has been a steadily declining rate of the U.S. GNP in the last 15 years.
Summary
If Warren Buffett is correct, investors should view projections of the declining rates of growth of the GNP as a warning that the entire investment base may be now more vulnerable to further reductions in the expected returns from capital.
