One, Two, Three, Four, I Declare a Trade War

The primary question on investors' minds during the second had to be how far the trade war would go between the U.S. and its trading partners. During most of the quarter, it seemed one could reasonably expect markets to be down one day and then up the next. It got to the point that I often tried to predict the day-to-day headlines of The Wall Street Journal. My idea of fun is probably different from yours.

If the scope of the trade war was the primary question on investors' minds, the second was whether or not the Federal Reserve would raise interest rates. Spoiler: It did - and the Fed indicated there would be two additional rate hikes in 2018.

Let's look at the numbers.

Q2 2018 Numbers

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, gained 3.7% during the second quarter, which brings the year-to-date return to 3.4%. Investors, still jittery about the long bull market and an escalating trade war with China couldn't get out of stocks fast enough. Nearly $59 billion flowed out of stock funds during the quarter.

International markets didn't fare well: The average diversified international stock fund declined by 2.1% in the second quarter, which brings the year-to-date loss to 2.7%. Investors were more optimistic about foreign stocks because $89 billion flowed into international stock funds during the quarter. Of course, international stocks will be affected by a trade war, so the shift to foreign markets may not help all that much in the long run.

The average intermediate-term bond fund lost 0.3% during the second, which brings the year-to-date loss to 1.7%. A whopping $128 billion flowed into bond funds during the quarter, again over concerns about the long bull market and trade war.

Expectations For The Third Quarter

When it comes to financial markets and investments, I honestly don't know what to expect. No one does. The best I can do is make a few educated guesses:

The U.S. and its trade partners will continue to talk about tariffs, which will lead to retaliatory actions or threats of actions.
Consumers and the global economy will be the casualties of a trade war.
In the event of a trade war, investors should look to small-cap stocks, which are less likely to be vulnerable to trade spats.
Since the Federal Reserve has already tipped its hand, and unless anything unanticipated happens, I believe it's safe to say there will be a rate increase during the third quarter.

As always, you should focus on what you can control. Make a financial plan that's right for your goals and financial situation. And stick to it.

Listening / Reading / Watching

Here's what has my attention right now:

The Three-Body Problem by Cixin Liu. Since I was going to spend two weeks in China, I decided to reread this excellent novel by China's most famous science fiction author. Go read it. Now.
The Dark Forest by Cixin Liu. And then I promptly started reading book two in the trilogy. Again, go read it. Now.
On to book three, Death's End.