Thursday , 28 March 2024

True or False: An Expanding Trade Deficit Is Bearish For Stock Market?

Q: Is it correct to assume throughout that an expanding trade deficit impacts the investing-4economy negatively? A: No, the relationship, if there is one, is that there has been a positive — not negative — correlation between the stock market and the trade deficit. Let me explain.

By Vadim Pokhlebkin/Robert Prechter (elliottwave.com) originally entitled Myth #3: “Expanding trade deficit is bad for the economy — and bearish for stocks.” (Part 3)*

Over the past 30 years, hundreds of articles have featured comments from economists about the worrisome nature of the U.S. trade deficit. It seems to be a reasonable thing to worry about but has it been correct to assume throughout this time that an expanding trade deficit impacts the economy negatively?

Figure 8 answers this question in the negative:

In fact, had these economists reversed their statements and expressed relief whenever the trade deficit began to expand and concern whenever it began to shrink, they would have accurately negotiated the ups and downs of the stock market and the economy over the past 35 years. The relationship, if there is one, is precisely the opposite of the one they believe is there. Over the span of these data, there in fact has been a positive — not negative — correlation between the stock market and the trade deficit so the popularly presumed effect on the economy is 100% wrong. Once again, economists who have asserted the usual causal relationship neglected to check the data…

Around 1998, articles began quoting a minority of economists who — probably after looking at a graph such as Figure 8 — started arguing the opposite claim. Fitting all our examples so far, they were easily able to reverse the exogenous-cause argument and have it still sound sensible. It goes like this: “In the past 30 years, when the U.S. economy has expanded, consumers have used their money and debt to purchase goods from overseas in greater quantity than foreigners were purchasing goods from U.S. producers. Prosperity brings more spending, and recession brings less so a rising U.S. economy coincides with a rising trade deficit, and vice versa.”

The above sounds reasonable but, once again, there is a subtle problem. If you examine the graph closely, you will see that peaks in the trade deficit preceded recessions in every case, sometimes by years, so one cannot blame recessions for a decline in the deficit.

Something is still wrong with the conventional style of reasoning.

[The above article is presented by  Lorimer Wilson, editor of  www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]

*http://www.elliottwave.com/freeupdates/archives/2014/09/10/Don-t-Get-Ruined-by-These-10-Popular-Investment-Myths-%28Part-III%29.aspx#axzz3IOE2gK92 (© 2014 Elliott Wave International)

If you liked this article then “Follow the munKNEE” & get each new post via

Related Articles:
Most economists (primarily Keynesians and monetarists) believe that authorities can control the money supply and interest rates, and most neo-Austrians believe that the Fed is all-powerful when it comes to inflating – that whatever inflation rate it wants, it simply manufactures. Is that true or false? Read on for the answer. Read More »
This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate. It’s basic physics but it doesn’t happen that way. Let’s examine the history of inflation and the precious metals since the low of the Great Depression. Read More »3. True or False: A Terrorist Attack Would Cause the Stock Market to Drop
It seems logical that a scary, destructive terrorist attack, particularly one that implies more attacks to come, would be bearish for stock prices – but has that actually been the case? Read More »
It would seem logical to say that peace allows companies to focus on manufacturing goods, providing services, innovation and competition, all of which helps the overall economy but does peace, in fact, have anything to do with determining stock prices? Read More »
A sensible story of causation regarding oil prices and stock prices made by countless economists is that “rising oil prices increase the cost of energy and therefore reduce corporate profits and consumers’ spending power, thus putting drags on stock prices and the economy.” Stunningly, as far as I can determine, however, no evidence supports that claim, as the discussion below will show. Read More »

6. True or False: Earnings Drive Stock Prices

The belief that earnings drive stock prices powers the bulk of the research on Wall Street but this glaring exception to the idea of a causal relationship between corporate earnings and stock prices challenges that theory. Let me explain. Read More »
It is common for economists to offer a forecast for the stock market yet add a caveat to the effect that “If a war shock or terrorist attack occurs, then I would have to modify my outlook.” As such, it would seem logical to assume that…they must have access to a study showing that such events affect the stock market, right? The answer is no, for the same reason that they do not check relationships between interest rates, oil prices or the trade balance and the stock market. The causality just seems too sensible to doubt. Read More »
Macroeconomic news supposedly explains only about one fifth of the movement in stock prices but if there is no accommodating theory, then the presumed causality involved is tenuous at best. Let me explain. Read More »
Events and conditions do not make investors behave in any particular way that can be identified as shown in this analysis of the supposed relationship between interest rates and stock prices. So much for the popular claim that “Interest rates drive stock prices”! Read More »