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Escalating trade tensions have made for a difficult investing environment. This is not news to anyone at this point. But investors’ angst was ratcheted higher last week after the Trump administration played its next card—announcing tariffs on an additional $200 billion in Chinese goods—sooner than many expected. Certainly the stock market expressed displeasure, though the 0.9% drop in the S&P 500 for the week still leaves the index with a respectable 4% total return this year. Here we provide our playbook for trade tensions.

Increased business capital expenditures, or “capex,” remain one of the most important pieces for improving the long-term growth trajectory of the U.S. economy. Capital expenditures help increase productivity, and improved productivity is the foundation for sustainable higher growth for developed economies. Both survey and hard data continue to confirm that we might be seeing a rebound in capex, but how can we know it’s sustainable? The answer may be in our beach reading. Like the veteran detective in a favorite page-turner, we look for means, motive, and opportunity. For capex spending, means translates to additional sources of funding for projects, motive comes from increased business confidence and tight labor markets, and opportunity from fiscal incentives and global growth.

The Federal Reserve (Fed) is widely expected to hike rates for the second time in 2018 at the conclusion of its two-day policy meeting on Wednesday, June 13. Given that the hike is all but priced in, the hike itself would mean little to markets. Instead, Fed watchers will be looking at any meaningful changes in the policy statement, a new set of economic projections, and Chair Jay Powell’s post-meeting press conference to gauge any changes to the future path of interest rates. There’s a reasonable chance that the median expectation for the number of rate hikes in 2018 in the new projections may shift from three to four, but we believe it’s more important to monitor any changes in the Fed’s inflation views to determine the likelihood that the Fed may shift to a more aggressive path of rate hikes. Unless we see a shift in the Fed’s view of inflation, we will continue to maintain a base case of three total rate hikes in 2018.

The May employment report confirmed that the job market remains healthy, with job creation showing signs of stabilizing after steadily slowing over the last several years. A healthy labor market should continue to provide support for the economy and consumer spending, and we may even see some acceleration as fiscal stimulus provides incentives that may draw more people into the labor force and encourage businesses to hire.

Small caps are having a strong year, with the Russell 2000 Index up nearly 6% year to date, versus about 2% for the S&P 500 Index. We came into this year expecting small cap outperformance, and after a slow start in early 2018 they have delivered in recent months. Many factors have aligned to drive continued potential leadership from this group. Here we highlight three keys to our small cap outlook.

The U.S. dollar has come back strongly. After losing nearly 10% in 2017 and an additional 4% in January, the U.S. Dollar Index has rallied more than 5% off of its February lows [Figure 1]. Gains have been driven by several factors, particularly rising U.S. interest rates, partially due to increasing Federal Reserve (Fed) rate hike expectations, and repatriation of overseas profits as prescribed by the new U.S. tax law. Weakness in emerging market (EM) currencies as a result of several flare-ups in trouble spots such as Turkey and Argentina, along with the populist wave in Italy, have added to support for the dollar. The dollar is important for many reasons, including its impact on international trade and on overseas corporate profits. So, where does the dollar go from here?