You can understand the current U.S. stock market very well just by watching the American steel manufacturers.

We'll give you a brief history of how the stocks of steel manufacturers have behaved around tariffs, but first, here's the broader point:

While the trade war between the U.S. and China may be inflationary in the near-term, it's ultimately seen as being disinflationary. Steel makers are especially sensitive to that dynamic, and they show why the Federal Reserve becomes more compelled to lower interest rates due to the trade war.

In the past five days, the outlook for a trade agreement has worsened, with Chinese leader Xi Jinping saying Monday China is no longer interested in a broad-based trade agreement with the U.S.

S&P 500 & Steel Stocks in the Past 5 Days

With the bearishness on trade, the S&P 500 is down 1.03% in the past five days. But Nucor (NUE - Get Report) , one of the largest U.S. manufacturers of steel, is down 2.7%. United States Steel Corporation (X - Get Report) is down 5.5% in that span, with Steel Dynamics (STLD - Get Report) down 5%.

But tariffs on Chinese goods -- a good portion of which are on steel and aluminum -- should raise the price of domestic steel. So those stocks should do well, right?

Well here's what has happened:

Steel Stocks Since Trade War's Inception

Trump placed his first batch of tariffs on Chinese goods in early March 2018, causing the price of hot rolled coil (steel) in the U.S. to jump.

Steel prices rose 22% from $745 per unit in early February 2018 to $912 in late July 2018, according to data from CME Group. Nucor shares rose 9.5%. United States Steel shares rose 7%. Steel Dynamics shares rose 10.1%.

But from July 2018 to the present, the price of hot rolled coil fell 45% to around $502. And since just before the trade war began in early 2018, Nucor stock is down 18%, with United States Steel down 68% and Steel Dynamics down 34%.

So what happened? Tariffs cause companies to raise prices, often before buyers of those products are ready to pay higher prices, hurting demand. Analysts noted at the end of 2018 that steel prices would have to come down because of weaker demand. And buyers of steel, such as automakers General Motors (GM - Get Report) or Ford (F - Get Report) , have had periods where they raised their car prices because higher metal prices were pinching their gross margins. That hurt auto demand, in turn hurting demand for steel.

If this dynamic plays out in the heavily-tariffed retail and other sectors, how come the S&P 500 has risen 7.1% since mid February 2018, just before the trade war? The answer is that lower interest rates since that time have helped support production and demand. And while the performance of FAANG and other tech growth stocks have recently tapered off a bit, several huge companies in the group have had outsized runs, namely Amazon (AMZN - Get Report) , Microsoft (MSFT - Get Report) , Apple (AAPL - Get Report) and Google (GOOGL - Get Report) .

Ultimately, the steel group is one of the most exposed to changes in economic demand, and the Federal Reserve becomes more compelled to lower interest rates when the trade war worsens. That's because tariffs are seen to be ultimately disinflationary. Watch those steel stocks. 

Apple, Microsoft, Amazon and Google are key holdings in Jim Cramer's Action Alerts PLUS charitable trust.