For those who follow stocks and stock markets, all too often, you'll hear or read a one pundit or another say stocks are overvalued or stocks are undervalued. What never you hear these pundits say is stocks are overvalued or undervalued relative to what.
Many use the S&P 500 as the benchmark index. The S&P 500 tracks 500 large firms, which having common stock listed either through the New York Stock Exchange or through NASDAQ.
Often, you'll get comparisons of the S&P 500 relative to the U.S. economy. Many believe the S&P 500 signals the near future of the U.S. economy. Should they, though?
Since 2003, revenues of S&P 500 firms earn outside the USA has averaged a bit more 45%. Said another way, S&P 500 firms earn 55% of their revenues from foreigners living in foreign lands. According to a 2011 Wall Street Journal story, "U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers ... employed 21.1 million people at home in 2009 and 10.3 million elsewhere."
On the face of it, the S&P 500 does not seem to be a good measure of the U.S. economy. What we would need to know is of the roughly 20% of American workers employed by S&P 500 firms, what percentage of total private sector income is the sum of their incomes.
Other indexes exist, like the S&P 400, which tracks stocks of firms total market capitalization that falls within $750 million to $3.3 billion. The Russell 3000 tracks stocks by market capitalization of 3,000 firms, which represent 98% of U.S. firms with publicly traded stocks.
The Russell 2000 tracks the bottom 2,000 stocks of the Russell 3000. The Russell 2000 represents only 8% of the total market cap of the Russell 3000. Said another way, the top 1000 firms of the Russell 3000 constitute 92% of the index.
As I showed in THE SECRETS OF AUTOMATED CLEARINGS, GDP AND THE ECONOMY. RECOVERY? WHEN?, no one should expect revival of the economy until true commercial clearings of banking transactions advance. No one should expect significant growth of the economy until true government clearings advance.