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A 'phase one' US-China trade deal would solve one major problem for the stock market

Brian Sozzi
Editor-at-Large

A phase one trade deal between the U.S. and China may be finally on the verge of getting signed. And it would go a long way to eradicating—even if for just a short while—the 2019 word of the year in Corporate America.

That is uncertainty.

The S&P 500 hit a fresh record after Trump said the U.S. and China were closing in on a “big” trade deal ahead of a Dec. 15 tariff deadline. A report from The Wall Street Journal said U.S. negotiators are offering to halt new China tariffs and lower current levies on the country’s goods by up to 50% on $360 billion of imports.

A spokesperson for the White House declined to comment to Yahoo Finance on the negotiations.

Talk to any number of CEOs (as we do frequently at Yahoo Finance) and they will tell you the U.S.-China trade tussle continues to weigh on their decision-making process.

For instance, does a CEO sign off on a mega deal for a company that has outsized exposure to China? Unlikely no in the current uncertain policy environment, based on chats with sources. Does a CEO build a new plant in the U.S. knowing full well they may have to pass on stiff tariff-related price increases to consumers, which could hurt the return profile of that new plant? Nope.

Or why release any form of upbeat financial guidance to investors for the next 12 months if one tweet from the president on trade conditions with China could send demand trends off course? The impetus to be bullish with respect to guidance is minimal at best right now.

"U.S. manufacturing clients have recently reduced demand, driven by trade-related uncertainty," ManpowerGroup CEO Jonas Prising told analysts on a third quarter earnings call. Alcoa CEO Roy Harvey echoed that cautious sentiment exiting the third quarter.

Said Harvey, “In our markets, we continue to project a global aluminum deficit for the year, but we’re reducing our global aluminum demand estimate due to macroeconomic headwinds and trade tensions.”

Weakness in business investment

Corporate America has voiced its concern with trade uncertainty in their amounts spent on fixed asset investment this year (or lack of spending) and on deals. Business investment tanked 3% in the third quarter, following a 1% drop in the second quarter per the U.S. Bureau of Economic Analysis. Growth in business investment clocked in at a 4.6% average in the first half of 2019.

Meanwhile, at $262.9 billion in deal value U.S. M&A activity plunged 32.1% in the third quarter, according to Mergermarket.

“Tariffs create that economic environment of policy uncertainty that really deters business investment. We have seen weakness in business investment and that could spill over at some point to employment. And that would be where it’s really problematic for the economy,” Invesco Chief Markets Strategist Kristina Hooper said on Yahoo Finance’s The First Trade.

A U.S. trade deal with China at the very least would give corporate chieftains the guidelines needed to proceed with big budget capital expenditure plans or transformative deals. That would remove a key overhang to stock prices. It may not be the precise guidelines they would like to see to remove all the aura of uncertainty, but it would be far better than the current rules of the road.

Or absent rules of the road on trade, we should say.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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