Trade Deficits Pop Quiz

Pop-quiz time!
(Don't worry, this won't go on your permanent record.)

1. Economically speaking, who would you rather have been over the last 25 years?

A. United States
B. United Kingdom
C. Japan
D. Germany

2. Who had the best stock market results in the last 25 years?

A. United States
B. United Kingdom
C. Japan
D. Germany

3. Who ran the largest trade deficits in the last 25 years?

A. United States
B. United Kingdom
C. Japan
D. Germany

The answer is "A" for all three questions. Today, reports indicated the US trade deficit hit an all-time high. But it's nothing to worry about for stocks. History shows trade deficits don't hurt stock returns and they don't hurt economies, either.

Would you rather be a Chinese company exporting a manufactured $10 part for an ipod, or Apple, which books a $100 profit on the completed ipod? In this scenario, the US runs a "trade deficit" to import parts to make the ipod, but the US company gets the profits. We'd choose the latter.

Only investing dunces fear trade deficits. Learn to ignore them and you'll get a gold star on your next pop quiz.