In our latest Chart for Thought, we explore an underappreciated mechanism: how trade imbalances may actually fuel U.S. financial markets. Drawing from data since 2008, we examine a surprisingly strong correlation between the U.S. trade deficit and the S&P 500.
Key Takeaways:
- Capital Feedback Loop: A growing U.S. trade deficit exports U.S. dollars globally — many of which are recycled back into U.S. financial markets via equities, bonds, alternatives, and other assets.
- Liquidity Engine: The U.S. dollar’s reserve status and the attractiveness of U.S. markets make this loop sticky — further reinforced by the post-2008 world of QE, globalization, and U.S. economic outperformance.
- Empirical Link: Since 2008, the year-over-year percentage change in the U.S. trade deficit and the S&P 500 show a strong positive correlation.
- Policy Implications: Efforts to reduce the trade deficit (e.g., reshoring, tariffs, etc.) may create headwinds unless offset by other economic levers.
- Looking Ahead: Investors and policymakers should pay close attention to how structural trade dynamics influence cross-border capital flows, U.S. financial market performance, and policy trade-offs in the years ahead.
