The machines warn of ‘significant’ downside risks facing the stock market

Blue chips on Friday managed to avoid their longest losing streak since 1978, putting an end to eight-straight down days with a triple-digit pop.

Everything’s fine, right?

Well, it’s true that the dreaded “trade war” has been more bite than bark so far, and investors have mostly treated it as such, with the recent stretch of selling hitting the Dow












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 with a 3% drop from peak to trough.

But the trade tensions won’t be going away anytime soon. One look at the big-font headlines splashed across financial websites and blogs tells you all you need to know about what the prevailing theme is heading into the week.

Oh, and yes, the presidential feed isn’t about to let up either:

So, there’s no shortage of worst-case scenarios to contemplate with regards to what happens to the global economy should the U.S. keep heading down this path. But what are the machines telling us?

To find out, Barron’s asked Wolfe Research’s Yin Luo, former star quant at Deutsche Bank












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 and longtime artificial-intelligence evangelist. He doesn’t see robots replacing money managers anytime soon, but he’s a big believer in the edge that machine learning can give investors. And those machines are firing off “trade war risk” signals.

“We have an algorithm that goes through every major media and social-media site, looking for key words related to trade conflict, like ‘trade tensions,’ ‘tariffs’ and ‘quotas,’” Luo explains. “It’s gauging the wisdom of crowds. Once people are talking about it, it is more relevant to stock performance. Today, [that chatter] is at its highest point since we started tracking these things in 2003.”

Couple political risks with rising interest rates and you probably don’t need a robot to tell you there are clouds hanging over this market.

“We are still bullish but warn investors that the downside risk is significant, which is different from last year,” Luo says. “We are at the peak point in the economic cycle, growth is showing some signs of weakening, and inflation continues to rise.”

So what’s an investor to do? In our call of the day, Luo says his models favor U.S. large-cap stocks, global real-estate investments trusts and gold.

“With U.S. stocks, we are bullish consumer discretionary, technology, and industrials over the medium horizon, and are negative on consumer staples and telecom services, where fundamentals remain relatively weak and momentum has been negative,” he says.

The market

The Dow Jones Industrial Average












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 is poised to start another streak into the red, with futures down premarket. The S&P 500












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 and Nasdaq-100












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 are also looking toward a negative open.

Gold












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 and WTI crude












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 are little changed. Asian markets












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 closed mostly lower, while Europe












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 is taking a hit. In crypto, bitcoin












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 is bouncing back after its latest drop.

Check out Market Snapshot for more.

The buzz

President Recep Tayyip Erdogan, one of Washington’s key allies, won a victory in Turkish elections on Sunday, as voters extended his 15-year hold on power and endorsed his increasingly authoritarian model of government. “I would like to congratulate our nation once again,” he said.

Struggling conglomerate General Electric












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 is about to ink a deal to sell a unit that makes large industrial engines to private-equity firm Advent International for at least $3 billion, sources told the Wall Street Journal. Word of an official deal is expected to hit as early as Monday.

Student housing developer Education Realty Trust












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 is being bought in a $4.6 billion all-cash deal by a Greystar-led fund.

The chart

This was always bound to be an issue for Trump and his administration, who have consistently trumpeted the surging stock market as a measure of policy success. So what happens when the selling starts, like it did last week?

The Calculated Risk blog’s Bill McBride admittedly doesn’t see the S&P












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 as such a great policy gauge. But, by request from his readers, he compared performance under Trump and Obama as a reminder of the perils of waving this rally in the face of White House critics. Here’s the chart he posted over the weekend:

Along with the many times Trump has puffed his chest over record highs, McBride laid out examples of the practice elsewhere in the administration.

Treasury Secretary Steven Mnuchin told CNBC last year that it’s a report card for the White House. “Absolutely, this is a mark-to-market business, and you see what the market thinks.” Years before that, Larry Kudlow, now the director of Trump’s National Economic Council, didn’t mince words. “I have long believed that stock markets are the best barometer of the health, wealth and security of a nation,” he wrote.

We’ll have to wait and see what Trump has to say if this bull market dies on his watch. Perhaps his recent comments regarding his visit with Kim provide a glimpse into what we can expect.

“I may stand before you in six months and say, ‘Hey, I was wrong,” Trump said during a news conference after the historic meeting. “I don’t know that I’ll ever admit that, but I’ll find some kind of an excuse.”

The stat

Reuters

$1 trillion — That’s how much the value of the intergalactic economy could reach under Trump’s proposed “Space Force,” according to a Morgan Stanley












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 research note.

“Our conversations with various actors (current and retired) in the U.S. government, military, and intelligence communities overwhelmingly indicate that space is an area where we will see significant development,” the analysts wrote.

The quote

“‘I don’t know’ is almost always the correct answer when someone asks you what’s going to happen in the markets” — This is just one of 36 “obvious investment truths” laid out by Ben Carlson of the “A Wealth of Common Sense” blog. They may be obvious, but they are definitely worth revisiting.

The economy

The Chicago Fed National Activity Index gets things started, data-wise, at 8:30 a.m. Eastern, followed by the release of new home sales data at 10 a.m.

Later in the week, economic highlights include housing prices from Case-Shiller on Tuesday and the third estimate of first quarter GDP on Thursday.

Read: The U.S. economy might hit this milestone for the first time in 11 years if Corporate America keeps it up

Investors will also hear from several Fed officials in the coming days, including Atlanta Fed President Raphael Bostic and Dallas Fed President Rob Kaplan on Monday. Two days later, Randal Quarles, Fed vice chairman for bank supervision, delivers a speech on international bank regulation at an event in Sun Valley, Idaho, while Boston Fed President Eric Rosengren speaks in Washington. St. Louis Fed President James Bullard on Thursday talks economy in a moderated conversation.

Random reads

With millennials, “Venmo anxiety” is apparently a thing.

Roseanne opens up about being a “hate magnet.”

What’s should we be more worried about: Kids spending too much time gazing into a screen … or their distracted parents?

Don’t worry, your poke addiction won’t lead to a tuna catastrophe.

“You’re out of your cotton-pickin’ mind”…. really?

And in case you missed this epic Tom Arnold interview:

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