The U.S. Budget Deficit, Exports, and a New Way to Think About Market Allocation

What You'll Learn in This Post:

• A historical view of the U.S. budget deficit and what it means for markets

• How U.S. exports have evolved and why they matter in this conversation

• A new way to evaluate deficits: comparing them to export levels

• A back-tested, rules-based model using the budget deficit-to-export ratio

• How this model may guide tactical asset allocation between stocks and bonds

• Why combining multiple models can enhance diversification and long-term value

The message that the U.S. economy maintains persistent budget and trade deficits and is highly reliant on foreign capital often pops up in the news, usually framed as some alarming, doomsday story. In this blog, we thought it would be interesting to explore what these deficits mean for major markets — and show that there may actually be a practical, research-backed way for investors to respond.

At Modelist, we spend time exploring data like this not to make headlines, but to uncover practical, evidence-based ways to help advisors manage asset allocation decisions. Here’s one such example.

1. Budget Deficit: A Long-Term Fixture of U.S. Policy

First off, what is the budget deficit? The federal budget deficit arises when government expenditures surpass revenues within a fiscal year. Over the past five decades, the U.S. has only experienced budget surpluses four times, with the most recent in 2001. As seen in the chart below, significant deficits have typically occurred during periods of economic downturn and crisis, such as the Great Recession and the COVID-19 pandemic.

In Keynesian economics, budget deficits are viewed as a tool to stimulate economic activity during periods of insufficient private sector demand. Over time, persistent deficits do contribute to the national debt, which can lead to higher interest rates and potentially crowd out private investment. However, the fact that the U.S. remains the world’s reserve currency helps sustain foreign demand for U.S. assets. We import goods and services from around the world — and in turn, the world happily buys U.S. stocks and bonds.

2. Exports: The Other Side of the Equation

Given this dynamic, it's also important to understand the other side of the ledger — the exports the U.S. sells globally. U.S. exports have grown significantly over the decades, reflecting our expansive industrial and technological capabilities. In 2022, U.S. exports totaled approximately $2.995 trillion, marking a 17.45% increase from the previous year.

The U.S. export portfolio includes goods such as aircraft, machinery, and agricultural products, along with services like finance, insurance, and intellectual property. The chart below shows the rolling annual total of U.S. exports in USD.

3. A Simple but Powerful Ratio: Deficit as a % of Exports

Since both the budget deficit and exports tend to grow over time, we thought it made sense to normalize the data and examine the budget deficit as a percentage of exports. Conceptually, it’s like looking at borrowing relative to income — but at a national level.

We spent time analyzing the chart and asking ourselves what it might mean for asset allocation. Intuitively, when budget deficits are large relative to exports — shown as the dips in the chart — it should be bullish for equities, as expansionary fiscal policy typically supports domestic economic growth. That often flows through into stronger corporate revenues and earnings.

At the same time, larger deficits also usually lead to greater government borrowing, which can push interest rates higher and lower bond prices. Put simply, those dips in the chart may correspond to periods when equities outperform bonds — while the peaks may represent environments where bond cash flows are more secure and fiscal support is absent, allowing bonds to outperform.

4. Translating Insight into a Model

While ideas like this can appear to work visually, it’s important to validate them with data — since the human eye is good at spotting patterns that may not be real. At Modelist, we regularly test ideas like this. Some are grounded in economic logic, others simply catch our interest based on visual or historical cues. But most fail when back-tested. We run these tests to identify strategies that are intuitive, show empirical strength across time, and can be applied going forward.

For this concept, we tested a simple five-year percentile ranking of the budget deficit-to-export ratio and created straightforward rules:

• When the ratio is near its five-year lows (meaning deficits are high relative to exports), the model shifts to overweight equities.

• When the ratio is near its five-year highs, the model tilts toward bonds.

• When the ratio is in the middle of its range, the model remains balanced, roughly 50/50.

Notably, periods like post-GFC (2009) and COVID (2020), when the government engaged in aggressive deficit spending, align well with equity outperformance — lending real-world support to the model’s logic.

5. The Caveats and the Broader Approach

Like all models, this one has limitations. It assumes the U.S. dollar retains its reserve currency status, that foreign investors continue buying U.S. assets, and that the U.S. government remains able to meet its obligations. Additionally, markets are influenced by a wide range of factors, so no single model can be relied upon exclusively.

That’s why we believe in building diversified models that reflect multiple market drivers. In other words, diversification still matters — not just across asset classes, but also across strategies and insights.

Research That Provides Value

At Modelist, we believe that research like this plays a meaningful role in helping advisors deliver long-term value through their asset allocation models. It’s not just about telling a good story — it’s about building portfolios informed by research, back-tested data, and logic that holds up across market cycles.

We offer access to over 50 research-driven strategies like this one — each designed to help advisors make tactical decisions within their custom models, all while maintaining transparency, scalability, and cost-efficiency.

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Make the most of these insights using Modelist. We create customized investment models for the fiduciary financial advisor. Get in touch with us at hello@modelist.me for a personal consultation.

Modelist Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.