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Bernie and the Coronavirus

Yesterday was a complicated day in the stock market. It was dealing with coronavirus fears, along with coming to grips with Bernie’s surge in the Nevada primary and what a socialist US president would do to markets. I’m feeling the Bern already.

Particularly hard hit were health insurance stocks, and it’s difficult to decipher which healthcare disaster was being priced in. Was it a remote possibility of a socialist president talking about shutting down the entire health insurance industry, or was it fears of widespread healthcare claims?

The bond market was the recipient of most of the cash moving around yesterday, but so was gold. The Segment ETF strategy added gold last August when the metal had just begun to shine again after reaching a previous peak in 2011. While gold does sparkle in this uncertain environment, I’m not sure how much help it has been. Since investors (including me) are mental accounters, we would think that being early in the gold resurgence trade would have had a remarkably positive impact. It took some of the sting out of yesterday, that’s for sure. But our gold position is only up 10% since August 13th. Surely it was the counter-cycle mover yesterday, but the SP500 is up the same amount since last August when you include the dividends, and stocks have better tax treatment than gold holdings. So yes, we avoided the 1000 point down day in that gold position yesterday and then some, but stocks have done equally well, even net of the 1000 point slide when considered overall. That’s the problem with mental accounting; it sees what it wants to see.

While the Covid-19 virus is surely scary, it’s rarely fatal, and coronaviruses are not new. As a matter of fact, prior studies of the SARS virus have given a University of Texas team a leg up on creating a possible vaccine. UT announced six days ago that their research team working on viruses filed for US patent protection for a coronavirus vaccine that might be able to use the virus to turn on itself. The research team of Wang, Corbett, Graham, and McLellan are the named inventors in the press release you can read here.

I am of the opinion that the downside frenzy could accelerate. Segment has been nibbling on some buys for clients with excessive cash. We will accelerate that if the downside picks up the pace and presents new opportunities. It’s times like these that get investors to thinking that they should sell everything and buy it all back lower. I have found that the more decisions one makes, the more opportunities we present to ourselves to mess it all up. Next thing you know, some surprise good news reverses the course and we’re left picking up the pieces. Then you have the taxes to deal with. Selling with profits causes a near certainty of taxes, while buying back lower is anything but certain. Then you have the emotional toll of wondering what to do next, and then talking yourself out of your best opportunities because certainty ebbs and flows, causing us to fall off both sides of the fence. Then there’s the biggie: selling gives up all of the previous ground on gaining a step-up in basis at death. Many investors don’t know that capital gains taxes on increase in value are forgiven by the IRS at any owner’s death. This is worth multiples more than simple deferral through inactivity.

My old friend and witty client, Max Herzstein, who died in 2011, used to fling open our office front door and exclaim to Linda, “don’t just do something Linda, stand there.” Precisely, Max!

Sincerely,

Gil Baumgarten, President