Can the Jeffrey Epstein Scandal Harm the Stock Market?

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And Could it Hurt Your Investment Portfolio?

What could the Jeffrey Epstein scandal possibly have to do with your portfolio? Hopefully nothing at all. But sometimes, big scandals have a way of touching the stock market in ways you might not expect…

In recent years, you’ve read my warnings to investors about General Electric (GE) in 2017 and 2018, and Boeing (BA) in 2019.

After more than a year of urging investors to sell General Electric (GE) stock due to continuous corporate problems, I went neutral on the GE share price in the December 2018 issue of my Cabot Undervalued Stocks Advisor, saying, “If I were previously playing with put options and short-selling, I’d rein in my positions now.”

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I urged people to wait until January 2019 before buying low on GE stock. Then in my January 2019 issue, I wrote, “Experienced traders can probably make money on the stock, and everybody else should stick with more fundamentally attractive companies.” GE shares are up 40% year to date, so it looks like my assessment of GE’s potential stock reaction was on target.

Then on March 15, Cabot published my comments on the Boeing 737 Max airplane problem in a post titled, Quit Making Excuses and Sell Boeing Stock, in which I reiterated my stance on how to handle scandals and corporate problems. “It’s time to be concerned, and ready to take action, when news emerges that damages a company’s multi-year financial prospects or reputation. This situation continues to unfold, with more bad news emerging daily. It’s going to be a bad year for Boeing stock.”

I mention these past situations with GE and Boeing because big problems and scandals have a way of growing and lasting much longer than anybody would have anticipated.

We know that when corporations are embroiled in scandals, their share prices fall. But what about other big scandals that make headlines? Can they affect the stock market, too?

The Jeffrey Epstein Scandal and Stocks

That brings me back to the Jeffrey Epstein sex crime situation (and if you don’t know what I’m referring to, look it up!).

The investor side of you might think, “Who cares if a few politicians and Hollywood people participated in criminal behavior? How could that harm the stock market?” I’m with you. But I’ve been thinking and thinking about this. “How bad could the Jeffrey Epstein scandal become, how famous might the participants be, and how will America react?”

Here’s what I’ve decided thus far. I’m going to watch and see if additional famous people are implicated or indicted, and I’m going to closely watch the stock market’s reaction. As a value investor, I usually don’t sell falling value stocks unless the corporate earnings outlook turns negative. I simply move them to a Hold recommendation, wait for them to bottom, and then prepare to make Buy recommendations at a more opportune time.

You, however, are not advising thousands of investors. You can do what seems most wise with your personal investment portfolio.

My suggestion is that IF news emerges on the Epstein case that shocks the public and pushes the stock market down a bit, begin raising cash by selling some stock. IF more bad news emerges and the market reacts negatively, raise more cash. And always remember: scandals have a way of continuing to unfold. We saw it happen with GE and we’re watching it happen with Boeing. If the market falls, it will be very nice to have cash available with which to buy low on later.

We don’t know what will become of this Jeffrey Epstein scandal, or how long it could drag on. I’ll revisit this topic if new developments warrant a discussion.

Editor’s Note: This post is an excerpt from a recent issue of the Cabot Undervalued Stocks Advisor. To learn how to subscribe, click here.

Timothy Lutts

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