The US election: What happens now?

09 November 2016 | Markets and economy



Ann Combs: Voters in the United States went to the polls on November 8 and elected Donald Trump. While President-elect Trump's campaign reflected his views, we'll gain more insight into the direction his administration will take in the coming months. And, of course, Congress will play a critical role in the development of future policies.

I'm Ann Combs, head of Vanguard Government Relations, and I am here today with Roger Aliaga-Díaz, Vanguard's chief economist for the Americas. We're going to discuss the impact of President-elect Trump's victory and what it means for the markets.

Roger, thank you for joining us today.

Roger Aliaga-Díaz: Great to be here, Ann.

Ann Combs: So, how have the markets been reacting to the news of the Trump presidency?

Roger Aliaga-Díaz: It was expected to get a little bit of heightened volatility, increased volatility from the fact that the markets were pricing in a different outcome, although we saw the polls moving in the weeks prior to the election. But clearly the markets are digesting the news and the surprise factor, and we expect basically over the next couple weeks this process to continue.

It's important for investors and for our clients to keep in mind that that normally happens in election processes, and sooner or later markets always go back to fundamentals. They basically go back to look at the economy. It's important to keep in mind the resiliency the US economy, in particular, has shown compared to a much weaker global economic environment.

Ann Combs: All right, well, that's a great point. Let's put it in some perspective. How have the markets reacted historically to this type of an event?

Roger Aliaga-Díaz: Yes, in every election volatility increases – particularly in election years where there is a change of party in the presidency. Basically data analysis shows there is 30%–40% higher volatility in years where the election leads to a change of party.

Ann Combs: Thirty to 40%?

Roger Aliaga-Díaz: — higher volatility than normal. And if you add to that the surprise factor – the fact that the markets were expecting a different outcome, clearly that's understandable. But at the end of the day, markets are much less ideological, much more pragmatic than the political discourse, and, again, markets do go back to fundamentals, do go back to the economy, shifting the focus back to the key drivers of the market as opposed to the political, electoral process itself.

Ann Combs: What advice do you have for investors during the period of uncertainty we'll face over the short term?

Roger Aliaga-Díaz: Basically, stay focused and keep perspective, and above all, don't make drastic changes to your portfolio. And there are a couple reasons, I mean, it's always good advice, but it's interesting to understand a little better why we always say that.

On the one hand is really the difficulty of predicting a very nuanced process in terms of how what starts as a political proposition or proposal ends up as an actual policy being implemented and what impact that has in the markets. Timing the markets is very difficult.

Ann Combs: What do you think the Trump administration means for the markets long-term?

Roger Aliaga-Díaz: There are a couple policies in Trump's platform that, to be honest, have received broad support across the economic and political spectrum. Economists of all colours basically have been supporting the idea of some sort of tax reform – particularly corporate tax reform. Infrastructure spending, also that goes with that. Those are the most concrete policies that I would say would receive attention from Congress. Hopefully they would pass quickly but I'm not sure how optimistic I am —

Ann Combs: "Quickly" is a relative term with Congress. I would agree with you though; those proposals, both infrastructure and tax reform, in particular corporate tax reform, have broad bipartisan support. I think there is a possibility for movement.

Roger, you've talked about the expectation that there may be volatility in the markets in the short term. But what about longer-term – the economy itself? How do you see this playing out?

Roger Aliaga-Díaz: We are optimistic about the long term. The reason, again, some of the issues have been debated during the campaign have been quite polarising, but they have been treated – they have been debated at a very high, generic level, and that has left a lot of room for a very healthy dose of more debate. We think that as deep and divisive [as] those topics are, we think that over time that debate will shape the actual policy implementations. And because of that, we're not negative on the markets and the economy.

Ann Combs: We've talked about the markets and the economy. We're talking to our investors. What about Vanguard?

Roger Aliaga-Díaz: To me, it's again the same concept. It's a broad asset base that goes across different asset classes and diversifying globally really tells us that Vanguard can withstand any type of volatility, especially short-term volatility of the [type] that we're talking about.

Ann Combs: Yeah, we're well positioned to —

Roger Aliaga-Díaz: No concern.

Ann Combs: Well, Roger, thank you so much for joining us today. This was really fascinating. And thank you all for joining us as well.

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