ETON Advisors Newsletter - January 2019

The Tide Shifts

2018 was a tough year for investors, with most major asset classes finishing with flat-to-negative returns for the calendar year.

Worries over monetary policy, economic growth, and trade wars are largely responsible for 2018's dismal results. Our view is that domestic economic growth will slow in mid-to-late 2019 but is unlikely to slip into a negative or recessionary territory, absent some “external shock."

Geopolitical risks could provide that external shock. Trade conflicts, government shutdowns, and political instabilities (both domestically and across the globe) remain wildcards that could simultaneously disrupt underlying economic activity and tilt consumer and investor sentiment in a decidedly negative direction.

The Fed's attempts at normalizing the interest rates it previously suppressed and removing the extraordinary liquidity it provided demand an odd combination of statistical analysis, political appraisal, and psychological guesswork. These processes are sure to produce “lumpy" rather than smooth economic and financial outcomes. In such an environment, market volatility will, we believe, remain well above the historic lows of recent years. Investors should prepare themselves and their portfolios accordingly.