A Cold Summer For Stocks?

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

The Dow Jones Industrial Average is down about 1% this week and is on pace to post its fifth consecutive weekly decline, its longest since 2011. The S&P 500 and Nasdaq Composite were headed for a third straight week of losses, their longest since December 2018.

The indexes got a small reprieve on Friday after President Donald Trump said the ongoing trade war could be over quickly. The Dow rose 110 points while the S&P 500 climbed 0.3% along with the Nasdaq.

“We still think the negotiators are going to reach a deal, but it’s clearly going to take a lot longer and be more difficult than investors thought a few weeks ago,” said Kate Warne, investment strategist at Edward Jones. “But any glimmer of hope that progress is being made will help stocks rebound.”

Crude prices dropped more than 6% this week as trade worries spilled over to other markets. Investors also loaded up on Treasurys this week. On Thursday, the 10-year Treasury note yield fell to its lowest level since October 2017.

“It seems, for the moment, [trade] is the only thing investors are thinking about,” said Mike Bailey, director of research at FBB Capital Partners. “You’ve got this one narrow issue that’s basically spreading across the entire market.”

“Investors had been hoping for more certainty,” Bailey said. “Instead, they’re getting more uncertainty across the board.”

It was a tough week for stocks and some sectors felt the brunt of the ongoing trade dispute with China more than others:

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%:

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:

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

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

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:

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:

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.