Discussing these issues in a recent Vanguard webinar were Jonathan Lemco, Ph.D., former professor of political science at Johns Hopkins University and senior investment strategist with Vanguard Investment Strategy Group; and Peter Westaway, Ph.D., former official at the Bank of England, Vanguard’s chief economist for Europe, and head of our European Investment Strategy Group. This is an edited transcript of their conversation.

Does the election of Donald Trump reflect a desire for major change in the U.S.?

Jonathan Lemco
Jonathan Lemco

Jonathan Lemco (senior investment strategist, Vanguard Investment Strategy Group): Almost 63 million Americans voted for him. It wasn’t a majority in the popular vote, or even a plurality, but it was a very big minority.

Who are these people? They come from varying backgrounds and demographics, but what many of them have in common is economic insecurity. They felt threatened by the notion of globalization and the perceived prospects of freer trade. It’s a broad fear of what trade or immigration can mean for individuals. It’s not unlike what we’re seeing all over the world.

The U.S. and U.K. are doing well—we are at or near full employment. So why is this feeling so pervasive?

Peter Westaway
Peter Westaway

Peter Westaway (Vanguard chief economist, Europe): It goes back to the point that Jonathan made. If you look at a worker with average income, that person has seen little increase in real income since about 1990. Normally when we see 2% GDP growth per year, we expect individuals’ real incomes to grow roughly like that too. The reality is we’ve had very little income growth in that period, which is astonishing. By contrast, people at the top of the income distribution, who have benefited from the trends towards globalization, have seen greater income increases. It is a real divergence and people are noticing it.

Jonathan Lemco: That’s right. When you survey the world, whether a government’s on the left, right, or center, many of these problems of economic inequality are growing.

In the U.S., the new administration has an ambitious program, with deregulation and fiscal reform at the front of the agenda. What is the likelihood of them being delivered?

Jonathan Lemco: The U.S. markets are most focused on things like regulation of the financial services industry under the Dodd-Frank law, especially the big banks. The perception is that if you ease the regulations associated with banking, banks will be freer to do more of what they want to do. Note what happened in the U.S. equity market in the months following the election. The banking sector did well—even better than the amazing returns we saw in the broader markets.

There’s also an expectation that deregulation will make it easier to get a business license, to do business in general. The United States used to be close to the top in terms of ease of doing business, but it’s now falling. It’s nowhere close to the top. The sense is if you get rid of red tape, then we’ll see meaningful growth in the broader economy, more job growth. At least that is the promise.

The president can introduce legislation, but Congress is going to play a very important role too, and it’s hard to say how it will play out. All we know is that there’s a mood for change.

With regard to tax reform, Mr. Trump is proposing that corporate tax rates have to be substantially reduced. At present, U.S. corporations pay a maximum 35% tax rate. Relative to other developed economies, that’s quite high. What is being discussed now are top rates of 15%, 20%, 25%, take your pick.

Part of this is an effort to encourage U.S. companies that have head offices in places like Dublin for tax reasons to come back home. Also we know that U.S. corporations, particularly the largest ones, are sitting on hundreds of billions of dollars in cash. The thinking is if you reduce their tax load, corporations will have incentives to spend that money in ways that will benefit the broader economy. Again, though, it’s hypothetical.

What is the likelihood of a meaningful infrastructure program for the U.S.?

Jonathan Lemco: It’s certainly true that the United States is desperate for infrastructure building. The thinking is, if you build roads and bridges it will be a boon for construction companies and all sorts of industries that are dependent on building. I think there will be a lot of support from both Democrats and Republicans once they’ve agreed on how much money should be spent, and on that point there will be controversy.

So the bottom line is, yes, I personally think, we will see legislation regarding deregulation, fiscal reform, and infrastructure building, but the numbers at the moment are all over the place, and it will take time. It will be the subject of tough negotiations between the executive and legislative branches of the government.

As we wrap up, what is the best response to all of these political and economic risks for a long-term investor?

Peter Westaway: There are a couple of things that have come through very clearly over the last six to nine months in the light of these political uncertainties.

First is that it is very difficult to predict how political events are going to play out. The second thing is even if you can foresee political events, it’s not always easy to predict how markets will respond. The huge rallies in the equity markets after the Brexit vote and the Trump election surprised many people.

The simple conclusion we draw is that any attempt by investors to position their portfolios to get the best out of political events is a fool’s errand. Sticking with long-term goals is generally a much better strategy.

Jonathan Lemco: One lesson international investors learn almost from day one is that there’s always going to be a civil war somewhere, an economic reversal somewhere else, or a natural disaster—an earthquake, for example, which may be a drag on a nation’s budget. It’s very hard for us to predict events, and as a consequence, I do believe that it’s in the investor’s interest, as Peter said, to stay broadly diversified, to have a long-term perspective, to keep your investing costs low. You’ve heard this from Vanguard in the past, of course, but it remains true.


Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.

All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.