During our middle school years, my pals and I escaped summer ennui by playing chicken with dirt bikes. We got banged up a lot.

Right now, the global game of “trade chicken” is banging up the economy.

The latest IHS Markit US Composite Purchasing Managers Index (PMI) shows a reading of 56 in June, down from 56.6 in May, signaling a weaker business expansion.

Most of the slowdown stemmed from the manufacturing sectors, with the Markit US Manufacturing PMI dropping 3.2% from last month to 54.6 in June. Survey respondents pointed to flagging order book growth due to trade uncertainties.

Stocks modestly rebounded today from yesterday’s rout, but trading was listless as the markets sought direction. Signs that the trade war is taking a tangible toll kept gains in check.

The latest trade skirmish directly pertains to technology. The U.S. Treasury Department is currently crafting rules that would prevent firms with at least 25% Chinese ownership from investing in U.S. companies involved in “industrially significant technology.”

These rules are expected to be unveiled sometime this week; China vows to remain undeterred. The news sent stocks plunging yesterday.

The Trump team’s proposed restrictions on technology investment cut to the heart of the global exchange of innovation. Tech firms have a lot to lose (see chart, compiled with 2017 data from Bloomberg):

The tech-related export controls slated for release this week specifically address China’s alleged theft of American intellectual property. Throughout history, military wars often got started with conflicts over trade. Savvy investors understand this. Yesterday, the Dow fell below its 200-day moving average and closed below it again today.

Technical traders use moving averages to gauge an asset’s long-term and short-term momentum. Breaking the moving average to the upside or the downside signals a reversal in overall direction. Some analysts consider breaking below the 200-day average to be the official end of a bull market.

Meanwhile, Chinese stocks are getting clobbered, a decline that could spark a global domino effect. The benchmark Shanghai Composite Index fell into bear market territory Tuesday, closing more than 20% below its high in January. The index fell 0.5% on the day.

The World Bank recently issued this warning:

An escalation of tariffs up to legally allowed bound rates could translate into a decline in global trade flows amounting to 9%, similar to the drop seen during the global financial crisis in 2008-09.

Uneasy rider…

In its trade war, the Trump administration has simultaneously taken on China, the European Union, Mexico, and Canada. Retaliatory tariffs from these countries against the U.S. are targeting goods produced in GOP constituencies that went for Trump in the 2016 election.

The trade war already is costing jobs in the American heartland. Wisconsin-based motorcycle maker Harley-Davidson (NYSE: HOG) announced this week that it will move some production overseas because of higher costs from the EU’s retaliatory tariffs against Trump’s duties on steel and aluminum.

Harley-Davidson is an iconic American brand, famous for manufacturing the “hogs” showcased in the 1969 counterculture film classic Easy Rider.

In a tweet today, President Trump angrily accused Harley-Davidson of lying about its rationale for shipping jobs overseas and threatened the company with punitive taxes.

To be sure, the blowback concerning red state produced products, from motorcycles to soybeans to bourbon, complicates the political equation for the White House. But as the crucial midterm elections approach, Trump’s tough talk on trade plays well with the president’s base.

My sense is that financial markets will have to endure accelerating trade tensions until at least the November elections are over.

One reason other countries haven’t conceded on trade is because many of Trump’s demands are literally impossible. The president has blamed Europe, for example, for “horrific” tariffs that in reality don’t exist.

The paradox is that U.S. economic data have been upbeat. Unemployment is falling, wage growth is moderate, consumer spending and confidence are high, manufacturing output is robust, and home prices are rising.

Keep an eye on market-moving economic reports this week on the calendar:

Wednesday: MBA Mortgage Applications, Durable Goods Orders, Pending Home Sales Index.

Thursday: Gross Domestic Product, Jobless Claims, Corporate Profits, Consumer Comfort Index.

Friday: Personal Income and Outlays, Chicago PMI, Consumer Sentiment.

Economic nationalism makes it extremely difficult for companies to invest, plan and forge deals. Supply chains get disrupted. Inflation is triggered. Growth is dampened. No one wins.

You should elevate cash levels and increase allocations to hedges. We’re in for a long, hot summer.

Tuesday Market Wrap

• DJIA: +0.12% or +30.31 points to close at 24,283.11
  
• S&P 500: +0.22% or +5.99 points to close at 2,723.06
  
• Nasdaq: +0.39% or +29.62 points to close at 7,561.63
  

Tuesday’s Big Gainers

• Lee Enterprises (NYSE: LEE) +19.79%

Media firm in deal to run Berkshire Hathaway’s (NYSE: BRK.A) news outlets.

• Argan (NYSE: AGX) +12.71%

Holding company joins venture to build power plant.

• Quantum (NYSE: QTM) +12.32%

Data storage provider finds new CEO.

Tuesday’s Big Decliners

• Achaogen (NSDQ: AKAO) -20.22%

FDA disapproves biotech’s anti-infection treatment.

• Fred’s (NSDQ: FRED) -16.67%

Retail drug chain faces growing competition.

• Hertz Global Holdings (NYSE: HTZ) -11.70%

Analysts see headwinds for car rental giant.

Letters to the Editor

“Did that last tax bill change the situation of equities at the time of death from a step-up to market to recognizing capital gains?” — Judy P.

“Stepped-up basis” is a tax break that the 2017 tax overhaul bill retained. Consequently, if you hold an asset without selling it until death, neither you nor your heirs will owe capital gains tax on the growth in its value during your lifetime. However, consult your tax advisor for individualized advice.

Questions about the Trump tax bill? Send me an email: mailbag@investingdaily.com

John Persinos is the managing editor at Investing Daily.