Stocks pare losses despite news of Michael Flynn pleading guilty to lying to FBI

Stocks pare losses despite news of Michael Flynn pleading guilty to lying to FBI
NEW YORK, NY - NOVEMBER 30: Traders work on the floor of the New York Stock Exchange (NYSE) ahead of the closing bell, November 30, 2017 in New York City. On Thursday afternoon, the Dow closed at over 24,000 points for the first time in its history. (Drew Angerer/Getty Images) ORG XMIT: 775085677 ORIG FILE ID: 883240698

The Dow pared its steep losses Friday in a turbulent trading session despite heightened political risk and confusion surrounding the Trump presidency and his economic agenda after former national security adviser Michael Flynn pleaded guilty to lying to the FBI.

The Dow fell by as much as 350 points in minutes in morning trading amid initial media reports that were later confirmed by prosecutors in court today that Flynn was fully cooperating with special counsel Robert Mueller’s probe of Russian interference in the 2016 presidential election and that a senior official of Trump's presidential transition team directed Flynn to make contact with the Russians.

The Dow recouped a big chunk of its losses and closed down just 41 points, or about 0.2%, to 24,231.59. The Dow topped 24,000 for the first time on Thursday.

Reports that Senate Republicans have the votes to pass its tax cut bill calmed investors' nerves. The market turnaround suggests that investors still see the benefit of tax cuts offsetting any downside due to Trump's political troubles.

The Flynn news initially unnerved financial markets, which have been rising on hopes that Trump's tax cut plan was moving closer to passage, which was viewed as positive for economic growth.

The latest turbulence in Washington raises fresh questions about Trump's political standing and ability to push through his legislative agenda.

"This introduces another layer of uncertainty which the markets hate," says Bill Hornbarger, chief investment officer at Moneta Group, an investment firm in Clayton, MO. "It will lead to more questions and turn the focus away from his legislative agenda and also sap support from people who want to distance themselves from him. This will make it more difficult for him to get things done until it is cleared up."

But not every one on Wall Street thinks today's legal headlines will derail the stock market or the Republican-led economic agenda as much as feared.

"Tax reform doesn’t need to be affected by the political and legal issues facing Mr. Flynn," says Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, N.C. "Ultimately the market will look past the politics and focus on the positive economy and benefits of tax reform and this is what will lead markets higher after they’ve been knocked down in the short run."

Zaccarelli added that he will advise his clients to buy stocks on large selloffs like today's brief but sizable decline until he sees signs of recession.

At least one Washington policy expert downplayed fears that Trump could be impeached and forced out of office like President Richard Nixon, who resigned from the presidency in 1974 after the Watergate scandal.

"I believe the chances of a Trump impeachment are very low, close to zero at the present time," says Tom Block, a Washington policy analyst at New York-based investment research firm Fundstrat Global Advisors. "While Nixon left with the threat of impeachment, no president has been removed from office via impeachment. There are not enough Republicans ready to take on Trump and his voters and supporters in Republican primaries to seriously talk of impeachment."

News of Trump's latest political troubles, some analysts say, could be the shock that pushes markets lower after a year during which stocks have gone up pretty much in a straight line.

"This could create the correction needed for stocks," Kotok said.

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