Why Fed's Powell Couldn't Save U.S. Stocks -- How to Invest Going Forward

For investors trying to get a handle on how to navigate the U.S. market, take a look at what happened Friday, which was a microcosm of the way the market is currently behaving.

Why Stocks Fell Friday

The Dow Jones Industrial Average fell as much as 700 points (2.5%) and the S&P 500 fell 2.58%, Friday. This came as investors grew less optimistic they'll see more interest rate cuts in 2019, a view that emerged on the same day the trade conflict between the U.S. and China seemed to worsen.

Friday morning, China said it wants to implement tariffs on $75 billion worth of American goods, including 5% tariffs on American oil and soybean sales to Chinese buyers. Shortly afterward, President Trump tweeted that American companies must "find an alternative to China."

The Chamber of Commerce did release a statement urging the White House to ease its stance on China, but investors need more certainty in order to resume more positive assumptions on the economy.

China's $75 billion threat is a retaliation against Trump's early August threat that the White House will impose an additional 10% to 25% tariffs on Chinese goods come December 15.

With some economists looking for U.S. GDP to decelerate to below 2% in 2019 -- partially resulting from the drag on domestic demand caused by the trade war -- investors are looking for more interest rate cuts from the Federal Reserve to stimulate the economy.

Federal Reserve Chairman Jerome Powell spoke in Jackson Hole Wyoming Friday. After he alluded to his preference to sustain the U.S.' expansion, he seemed to defer somewhat to the two Fed bankers who are not vouching for more rate cuts.

"Notably, he did not repeat the phrase -- which markets did not like -- "mid-cycle adjustment,"" said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance. Simply put, Powell wasn't come close to using explicit language about rate cuts. The "trade war escalation has already overshadowed the Jackson Hole speech," Zaccarelli said.

To make matters worse, Trump said he wants to raise tariffs to 30% from 25% on existing tariffs on a $250 billion batch of goods. The president made the announcement late Friday after initial publication of this report. 

All in all, the developments out Friday were seen as net-negative for stocks, prompting a sell-off.

Meanwhile, the 10 year treasury fell below a 1.5% yield, signifying the market's view that if the Fed keeps rates steady, the economy will decelerate fast than anticipated, furthering the case for rate cuts.

How Investors Need to Think 

Investors have made it clear that stocks won't bid higher until it's obvious there will be rate cuts.

Many strategists have said that the global economy is ailing to such an extent that rate cuts may not stimulate growth worldwide hugely, but rather that it would support growth. It would provide a support level, or floor, to stock prices because it would both stimulate business and consumer investment and lift the present value of future corporate cash flows. 

Given the dimming outlook for GDP and for inflation to break above 2%, "The stage looks set for a September {rate} cut," said James McCann, senior global economist at Aberdeen Standard Investments. "The concern in markets will be that a slow and steady Fed might be falling behind the curve." 

Related. Jim Cramer: A Cold War With China Is Worth Avoiding.