​Trade Deficits Are Great for Stocks

Ivan Illán |

There’s been plenty of discussion about trade deficits over the past couple of years. During the campaign, and now as President, Trump has mentioned repeatedly how “not good” the U.S. trade deficit is compared to other developed nations around the world. Often, Germany has been called out for having a very enviable trade surplus. But, a little research shows that trade deficits or surpluses are neither good nor bad, but simply a symptom of economic dynamics, resulting from a confluence of factors ranging from currency exchange rates to costs of production. These factors help meet the consumer’s never-ending desire for the highest quality product at lowest possible price.



Since the depths of the Great Recession in January 2009, the S&P 500 Index has returned nearly 200%. The US trade deficit during this time has expanded 23% (see chart above). In the years just following the recession the stock market and the trade deficit moved in dramatic correlated fashion. From May 2009 to May 2012 (immediately post-recession), the S&P 500 grew 50%, while the US trade deficit grew nearly double at 92%. Was this deficit expansion a key fuel to our current bull market in US equities, as lower priced imports fueled better corporate earnings?

Trade deficits since 2012 have continued to evolve. Energy imports have fallen significantly, and only to be offset with major growth of US imports in electronics (from China) and machinery (from Mexico and Canada), hence much of the status quo trend visible in the chart since 2012. For much of the post-recession period the US Dollar has been very strong, and this too hasn’t helped keep the US deficit elevated, as US exports remained too pricey to non-US buyers. But, this is changing as US Dollar strength wanes, and non-US consumers choose to “Buy American” – high quality for a lower price.

Politics have little impact on trade deficits – as technology, sovereign comparative industrial advantages, and currency exchange rates are fairly removed from government influence – or at least they certainly should be.

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