“Maybe your weird is my normal. Who’s to say?” – Nicki Minaj

I’ve had numerous conversations with financial advisers over the last several weeks about the current state of markets and thoughts on asset allocation in 2017. Many of these advisers who use our strategies believe that it’s going to be another strong year. We have a pro-business President, the prospect of reduced regulation and lower taxes, and reflationary hope picking up. The consensus is that bonds will continue to sell off and we are at the cusp of another major secular thrust for equities.

When asked if I agree? I give the best answer I can: “I don’t know.” As much as I write and provide market commentary, the (harsh) reality is that my crystal ball is as foggy as everyone else’s. I have no idea if stocks will end the year higher than they are now, but I do feel confident in saying that the cycle is normalizing. The great frustration for several years by active managers has been that historical behavior in what leads a market up or down failed to persist. The hunt for yield resulted in a bull market led by traditionally defensive assets, whereas more cyclical ones tied to growth and inflation lagged. Put simply, risk-off was the way to play risk-on with hindsight.

Finally, for the last several months risk-on behaves risk-on. High beta and more cyclical names take broad market averages higher. The yield curve steepens on strong up periods for equities, and flattens as equities drop. What is important now is that relationships which active managers relied upon for their portfolio allocations are finally starting to matter again. Yes, the media focuses on the term “normalization” in terms of interest rates, but true normalization goes beyond the cost of capital.

What excites me about this is that it signals a change in market psychology, and likely allow many forms of active strategies to outperform. We should also expect that there will be true risk-off periods ahead. The question for 2017 is not about whether stocks go up or down. It’s if they do both. And so long as risk-on looks risk-on, and risk-off looks risk-off, I suspect those strategies which thrive in down periods can have a year where active management trumps passive.

Oh, and to be clear – I cringed when I put that quote in from Nicki Minaj as well…