APR. 08, 2021
Source: Census Bureau
The U.S. trade deficit hit a new record high $71.1 billion in February, as exports fell by the most in nine months while imports declined only modestly. Imports are now outpacing exports on an annual basis by 15 full percentage points, the widest gap in more than three decades, in a reflection of the relative strength of the U.S. in the early stages of this cycle. This obviously owes in large part to a world-beating vaccine rollout, but it is also in keeping with the historical tendency for the U.S. to lead the rest of the globe into both expansions and recessions. In fact, imports have outpaced exports by a sizeable margin on average in the first phase of economic recoveries before catch-up growth outside of the U.S. has allowed the two series to move largely in lockstep as the cycle has matured. Not coincidentally, U.S. stocks have also outperformed early in expansions before generally falling behind other developed markets in the heart of the cycle (the 2009-20 expansion was an obvious exception).
Moreover, the gap between the U.S. and the rest of the world is unlikely to close quickly. The updated IMF forecasts out yesterday have the U.S. expanding by 6.4 percent in 2021 versus 5.1 percent across all advanced economies, 4.4 percent in the eurozone, and 3.3 percent in Japan. The IMF outlook should, as always, be taken with a grain of salt as it has often been more lagging than leading, but these numbers jibe to a large degree with both the prevailing trend and the leading indicators (note, for example, that the OECD’s leading indicator for the U.S. is up by 1.6 percent over the last three months while the metrics for Europe and Japan are rising by just 0.2 percent and 0.4 percent, respectively, over the same time frame).
Still, it is to be expected that the idiosyncratic factors that have helped to push the U.S. to the top of the table will equalize before long. Vaccines will eventually be widely available around the globe and the post-pandemic boom already unfolding domestically will be repeated in virtually every other market. Longer-term, it is also a good bet that the enormous valuation gap that has opened up between the U.S. and the rest of the world will drive a period of catch-up performance as the expansion broadens. Consider that the EAFE currently sports a price/book ratio of 1.81, less than half the S&P 500’s 4.46. U.S. stocks have long been accorded a premium due in large part to a greater concentration of fast-growing tech companies, but the spread is now wide enough relative to normal (the gap between the two P/B ratios has typically been roughly one point) to suggest some convergence in the market once the economies are moving more broadly in line. The second and third years of a bull market have historically been marked by decelerating gains in the S&P 500, but they might in this case also see indices outside of the U.S. picking up some of the slack.
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