If you’re at all surprised by this week’s weakness in stocks you haven’t been watching my recent videos. Which is perfectly fine as long as your surprise isn’t combined with intense worry. If it is, then you might want to take the few minutes a few times each week and take them in. My aim is to put short-term market volatility into what I believe to be its proper light.

The media has to sell its stuff, therefore the fact that scary stuff evokes a stronger physiological response in humans than does light and cheery stuff—and that humans have a perverse penchant for taking the bates that enhance those physiological responses (fears)—means that when the likes of famed investor Carl Icahn say “the market has a day of reckoning coming”, or when his pal Donald Trump says “the bubble’s about to burst”, the media will plaster those quotes into every headline from here to Timbuktu!

Reminds of the time a few years ago when I teased a blog post with:

“At approximately 4am last Thursday I was woken from a deep sleep by the deafening sound of an extremely anxious five-foot long diamond back rattlesnake, coiled at the foot of my bed.  I froze, our eyes locked, his blood-red forked tongue slithered in the direction of his gaze as he positioned himself to strike. I”.

That post broke the all-time record for hits to my blog site.

Bespoke Investment Group made the point last week while recognizing that when an indicator that was very recently viewed as a harbinger of terrible things to come for the Eurozone banking sector/credit markets—and plastered from here to Timbuktu in the financial press—did a positive 180, a media accounting of the bullish development was nowhere to be found:

“It’s important, in our view, to note that the CoCo market (aka contingent convertibles; bonds that can be turned into equity) has exploded higher in price and therefore return over the last few weeks, and is now back to an entirely normal level (chart). Despite the impressive recovery, we see no charts of CoCos in our Twitter feeds, scans of news sites, or on the television; the credit rally has been stealthy and out of the purview of commentators that drive page views via fear.”

Hmm…

Now, the above was not me setting the stage to drown you in positivity about markets and the economy. In fact, per my video commentaries, I haven’t been at all positive on the very near-term prospects for stocks.

As for the intermediate-term I see the risks fairly balanced. As follows:

Positivity:

Trend is presently higher

Cyclical sectors have assumed leadership

Impressive breadth

Dovish Fed

Dovish foreign central banks

Commodities rebounding

Sentiment sour

High short interest

Hedge funds way behind

ISMs (manufacturing and services surveys) signal expansion

Weakening dollar

Negativity:

Profit margins peaked

Charts looking toppy

Lower highs

Rich valuations

Tighter Fed going forward

Global uncertainty

Election year with termed-out president

Great Britain referendum

As for the long-term I see folks driving new cars, sporting new sneakers, texting on new phones, seeing new places, trying new restaurants, making new Facebook friends, listening to new music, going to new movies, opening new stores, building new homes, taking new meds, drinking new coffees, investing for the future, etc. That is, for the long-term I’m crazy bullish on owning global franchises!

Speaking of global franchises, I have a sneaking suspicion that the days of the U.S. equity market outperforming its foreign peers are near their end, for the time being. Why? Well, for a few reasons: One, notice under “negativity” above that “Tighter Fed going forward” was not followed by “Tighter foreign central banks going forward”. Nope, most of our trading partners are many months behind us in terms of what I’ll call the monetary policy cycle. I.e., they’re desperate to inflate their local asset prices.

And, per the chart below, they’re behind us in the profit cycle as well. Notice how the S&P 500 (top panel) has seen profit margins that have recently surpassed their high of 2007 (9.52%) and are presently trending lower. Versus the MSCI Europe, Australia and Far East and the MSCI Emerging Markets Indexes (panels 2 and 3 respectively), which have room yet to run before reclaiming their higher watermarks (9.28% and 12.83% respectively).          Click each chart, wait a second, then click again to enlarge…

And notice how prices (purple line) tend to follow margins (i.e., U.S. stocks may catch down):

And notice the recent trends in GDP (U.S top panel, Eurozone panel 2, Emerging Markets panel 3):

Although I suspect that, given much anecdotal data (the generally leading indicator stuff), the U.S. trend in GDP will slope noticeably higher throughout the balance of 2016. Which would, one would expect, bring (on strong) the Fed headwind—which, however, would, one would expect, be somewhat quelled (ultimately) by the better corporate results that would accompany a better economy.

And take a look at valuations (price to earnings ratios [S&P 500 blue, Developed Non-U.S. green, Emerging Markets red]). I.e., U.S. stocks (in the aggregate) look relatively pricey:

And how about dividend yields (same color codes as previous chart):

Again, I see potentially good things for our non-U.S. exposure going forward, relative to the U.S.. That said, we’ll remain very diversified—of course!

Have a great weekend!

Marty