A Cold Summer for Stocks?

Leo Kolivakis  |

CNBC reported last week that stocks continued their five-week decline after a brief rally when President Donald Trump said the ongoing trade war could be over quickly:

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Energy, Technology, Materials, and Industrials posted the biggest losses this week while Utilities, Healthcare and Real Estate posted positive gains.

While some are worried this isn't just a trade war but a new Cold War with China, I happen to believe cooler heads will prevail, especially going into the next US elections.

Importantly, it's in Trump and Xi's best interest to find common ground and deescalate the situation.

On Thursday, IHS Markit reported the US Manufacturing PMI (purchasing managers index) dropped to 50.6 in May from 52.6 in April, the lowest level since September 2009. The Composite PMI also fell to 50.9 from 53. While still indicating expansion (a reading above 50 is expansionary), US economic momentum is clearly decelerating and both of these readings fell short of market expectations.

Chris Williamson, Markit’s chief business economist, cited trade tensions as topping the list of concerns for reduced manufacturing activity which risks spreading to the service sector, but I think there is something else going on here, namely, the lagged effects of the Fed's rate hikes are starting to show up in the data.

Don't get me wrong, of course trade wars matter, but it would be wrong to conclude that is the only thing weighing down the US economy right now. UBS strategist Francois Trahan explained this on CNBC last week (see below).

A slowing US economy is the main reason why US long bond prices TLT are surging this week as the yield on the 10-year Treasury bond fell to 2.32%:

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The bond market is sending a signal to prepare for lower growth ahead. And I agree with Jeffrey Snider, rate cuts are coming.

The stock market is also sending a slowdown signal but it remains to be seen whether the pullback in the S&P 500 SPY is just a temporary one or the start of something more ominous, like revisiting the December lows or worse:

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Somewhat worryingly, semiconductor stocks SMH got clobbered this week, breaking below a key technical level, and they typically lead tech stocks:

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Emerging-market stocks EEM also got clobbered this week as trade tensions escalated:

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This too is worrisome because it suggests global growth is slowing, lending more support to bonds.

Not surprisingly, the rally in bonds has lifted utilities' shares XLU to new highs as investors seek refuge in high-yielding stable sectors:

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It's too early to conclude the summer doldrums are upon us but so far the old adage "Sell in May and Go Away!" seems to have been the right call.

On that note, here are this week's large cap advancers and decliners:

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Below, Jason Pride, CIO of Glenmede, and Ron Insana, CNBC senior analyst and commentator, join CNBC's "Power Lunch" team to break down how investors can play the market during trade tensions with China.

And Sameer Samana, Wells Fargo senior global market strategist, and Benn Steil, Council on Foreign Relations director of international economics, join "Squawk on the Street" to discuss the impact of trade negotiations on the market.

Lastly, UBS strategist Francois Trahan joined 'Squawk Box' last week to explain why the lagged effects of the Fed's rate hikes are only now kicking in and it would be unwise to solely blame trade tensions for the market selloff.

Link to original article on Pension Pulse.

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