Our commentary for the new year is not filled with predictions but describes an uncertain world of extremes for 2017. This uncertainty exists because the rise of populism seen in 2016 will have to be converted into macro policies during 2017. This potential regime change will cause new risks that what we have seen in past.
Financial markets are already reacting to these expectations; however, there will be an economic environment beset with extremes as policies are chosen or discarded. Additionally, we don’t know if these changes will have their intended effect.
We see the economic world as being bimodal. One extreme will be the pessimism of secular stagnation while the other will be the new optimism of Trumpism. Expectations will vacillate between these two extremes and create a more fat-tailed environment. In this world, we suggest investors increase portfolio diversification with a tilt to those strategies that add convexity and do well during market divergences. For more details, read our research piece on preparing for the new year.
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