“Shake it off!”

That’s what they said, “just shake it off.”         

I’d taken a tumble on the streets of New York City this weekend, and the universal cure suggested was “just shake it off.” Although I have a little tenderness in the wrist and ankle today, I have to admit that the recommended remedy worked.

It got me thinking about how many times we get this advice, or its equivalent, as we proceed through life. It seems omnipresent.

You get a leg cramp in training, and your trainer says “just shake it off.” Your Little Leaguer slides hard into second, jamming his leg. “Just walk it off,” counsels his coach. Bad election result, relationship break up, terrible meeting at the office, hard day with the kids: “Tough it out.” “Shake it off.”

It doesn’t matter that, practically, doing nothing and resuming what you are doing might not be the best advice. Medical professionals say that when you take a bad fall, you should stay on the ground until assessed by a med tech. Psychologists say that when something bad happens in life, you are probably better off “talking it out” rather than “toughing it out.”

We often see amateur athletes, and even some of the pros, do more harm than good when they play hurt instead of taking a breather. And then there is the whole “concussion thing.”

A 2006 study of girls’ softball found that the oft-heard “shake it off” advice ran counter to the girls’ upbringings. Most said they had not been exposed to the advice before becoming involved in the sport. Yet, after a year of competitive playing, it was found that nearly all of the girls in the study “conformed to the norms of the sport ethic and learned to deal with pain and injuries by ‘shaking them off’ and ‘toughing them out.’”

The ubiquity of the guidance was shown today as I listened to the early financial market report.

The market, said the commentator, was “shaking off” the news in Washington and moving higher.

Now, I know when the media, especially during the last 12 months, mentions “the news in Washington,” you don’t know whether they are making a pejorative reference or if there is truly “news in Washington.” However, in this case (Fox Business Report), they were referencing what they believed was the negative news that neither the health-care nor the tax-relief legislation seemed to be making much progress.

They believed that the stock market rally of almost 20% since the election was due to the enthusiasm for the president’s announced economic policies. So, since these policies haven’t been enacted within his first 150 days in office, they are considered delayed—and if their prospects are dimmed, market prospects must also be darker. But if this is the case, why are stocks still moving higher?

Of course, as with all things, like the wisdom of “shaking it off,” there is more than one explanation. Others may believe that the stall going on in Washington is a good thing because they don’t like the policies anyway.

Still, anyone who has worked for Congress, as I have, knows that things always happen more slowly in that city than practically anywhere else in this country. It took the previous administration over a year to create its health-care bill. The Reagan revolution’s tax relief also took over a year to get enacted. In the life of the congressional glacier, 150 days is nothing. So I don’t think the so-called delay is truly an unexpected delay in the first place.

If you want to look to Washington as an explanation for the market’s behavior, I think a third rationale may be at work.

As I have often remarked, there are two things the financial markets hate: uncertainty and change. When it comes to present-day Washington, you get two for the price of one. Both of the legislative goals involve change, and whether they will pass and what they will contain are both uncertain.

Currently, the stalemate, whether caused by Democratic obstruction or Republican ineptitude, means the status quo persists. This outcome involves neither change nor uncertainty as to the terms. Given that the momentum is up, the market continues to go up. I would not be surprised to see the market tumble if and when something passes on either or both of these legislative measures.

But this will not be for the reasons that the commentators will advance. Rather it’s more likely that the certainty of the change and the terms of the new laws will cause uncertainty as to their effect on the real economy, and that will give the market and the rally pause.

But then the experts almost always get it wrong. Captain America has a great line in the movie Avengers 2: “You get killed, walk it off.” However, the expert Chinese interpreters preparing the movie for release there translated the dialogue as “Someone is trying to kill you. Run! Run! Run!”

Market update

While I was in NYC, I was fortunate to be on the New York Stock Exchange floor when the closing bell was rung on Friday afternoon. And, sure enough, I saw that the stock market was once again going to “shake off” any negativity, regardless of source, and close higher.

As we suggested would be the case in last week’s Hotline, stocks ended the day Monday (6/19) with another new all-time high. It was the 24th of the year. Then stocks fell for three straight days before Friday’s rally.

Still, going into today’s trading, all three stock market indexes closed the week on the upside, led by the tech-heavy NASDAQ. For the quarter, they have gained about 3.6% to 10%, and their year-to-date gains range from about 10% to 20%.

In contrast to the impressive gains, the losses encountered have underwhelmed. The S&P has now gone more than 150 days without a 5% decline, more than all but seven periods since 1928, and the longest since 1996.

So far, the worst down period of the year was back in March–April and totaled a paltry 2.8%. This is the second-lowest first-half drawdown in market history (only 1995 was lower). When the first-half drawdown has been below 5%, research from the Bespoke Investment Group finds that in the 17 instances since 1928, volatility has generally been below average in the second half of the year and returns have been above average.

Prospects brightened a bit, too, last week based on economic and earnings data. Eight of the nine companies reporting earnings detailed higher-than-expected numbers. And while there were only a few economic reports, for the first time in quite a while, better-than-expected reports eked out a lead over disappointing ones by a five to four count.

The one economic report that met expectations was the Index of Leading Economic Indicators, which was up 0.3. That, too, is positive news. The ratio of that index to the Index of Coincident Economic Indicators has fallen before every recession. As the following graph demonstrates, the ratio is currently rising.

Finally, and most importantly, none of our tactical, intermediate-term strategies are currently signaling a major decline. Even the mean-reversionary strategies, which tend to be very short-term, are not signaling a decline. We do remain in a negative seasonality period, but that switches to the bullish mode on the 29th. Finally, although a decline can always develop, it is encouraging that our All-Terrain and volatility quadrants remain positive for stocks.

I often like to pair my Market Hotline commentary with a popular song. Sometimes the lyrics tie in quite well with the usually more serious themes. For this newsletter, the only song that comes to mind is Taylor Swift’s 2014 song “Shake It Off.” However, being written by Taylor Swift, the best lyric tie-in I could find was the closing line:

“I, I shake it off. I shake it off.” 

Oh well…

All the best,

Jerry