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Stocks close lower after taking wild ride on Flynn report

CNBC logo CNBC 12/1/2017 Alexandra Gibbs and Fred Imbert

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Stocks went on a wild ride Friday, falling sharply on a report that Michael Flynn was directed by President Trump to talk to Russians.

ABC News reported that Flynn, the former national security adviser, would testify that he was directed to make contact with Russians during the presidential campaign in 2016. Flynn pleaded guilty to lying to the FBI about his post-election contacts with Russia's ambassador to the U.S. 

ABC said later in an updated report that Flynn will say Trump asked him to make contact with Russia "initially as a way to work together to fight ISIS in Syria."

In a statement, Flynn said he agreed to "cooperate with the Special Counsel's Office reflect a decision I made in the best interests of my family and of our country."

"If you believe the market has been rallying in the last 13 months [on Trump, this report] potentially unravels all of that," said Jeremy Klein, a chief market strategist at FBN Securities. "Markets don't like uncertainty and this is the ultimate uncertainty."

The major averages hit their session lows after the report, with the Dow briefly dropping 350 points before recovering to close just 40 points lower. The S&P 500 finished down by 0.2 percent after falling 1.4 percent. The Nasdaq lagged, shedding 0.38 percent.

Gold and Treasurys spiked after the ABC report as investors fled to market havens.

"It comes down to did Trump obstruct justice in any way," said Peter Boockvar, a chief market analyst at The Lindsey Group. "It's another potential political blindside. We've gotten a lot of those."

But it appears many traders were willing to bet that the Flynn report does not mean the Mueller probe will lead directly to Trump and derail his presidency and economic agenda.

Stocks pared their losses after Sen. Mitch McConnell told reporters Republicans had the votes to pass the Senate tax bill.

"If you took out the Flynn news, we'd probably be up right now, but if you took out the tax news, we'd see more volatility" in the market, said Wade Balliet, a chief investment strategist at Bank of the West. "I think they're canceling each other out." 

The Senate delayed voting on the tax bill Thursday, sending stock futures lower. The setback concerned a fiscal "trigger" that forced lawmakers to patch up the plan only hours before a planned final vote. But futures cut their losses as the Senate showed signs of progress on coming to an agreement on a tax measure.

Republican Sens. Steve Daines and Ron Johnson — two of the last GOP holdouts on the bill — said they would support the measure, increasing the likelihood of it passing.

Expectations for lower corporate taxes have been a boon for U.S. stocks since President Donald Trump got elected, helping the major indexes reach all-time highs. Jeff Carbone, a managing partner of Cornerstone Financial Partners, said that without a corporate tax cut, stocks could suffer a 3 to 5 percent pullback in the short term.

If the Senate's bill passes, House and Senate members would have to work on a new bill to reconcile differences between their two tax bills.

Bruce Bittles, a chief investment strategist at Baird, said the market realizes "the Republican party wants to get this done one way or the other" but added that "the big question is how much of this is already built into the market."

"We're sitting at all-time highs, and I wouldn't be surprised if we took some [gains] off the table" after the corporate taxes are cut, Bittles said.

In corporate news, shares of Mylan jumped 4.6 percent after CNBC reported that Amazon has held preliminary talks with generic drug makers about a potential entry into pharmaceuticals.

Ulta Beauty was the worst-performing stock in the S&P 500, falling 7.5 percent after the cosmetics retailer issued weaker-than-expected guidance for the current quarter.


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