Global stocks have been on a slide lately as traders worry about the developing world’s ability to grow without the U.S. consumer and about fallout from the Chinese government’s decision to cut back on the massive expansion of credit that has kept its factories busy. China’s Shanghai stock exchange has lost some 20% just over the last two weeks. It fell 4.3% on Wednesday alone. 

Much of the concern is based on the 56% gain in emerging equities since last December when the OECD’s composite index of leading economic indicators bottomed. According to Credit Suisse analysts, it is nearly twice the average rally typically seen after these indicators reach a low.

So should we sell our emerging markets’ ETF position? 

I don’t believe so. In fact, I think investors should be taking advantage of the recent slide by adding to iShares MSCI Emerging Markets Income ETF (EEM) position, as well iShares S&P Latin America 40 Index (ETF) (ILF), which is driven largely by stocks in Brazil, Mexico and Chile. You probably don’t think much about Chile, but it is basically the Spanish-speaking equivalent of resource-rich Russia, but without the authoritarian government, aging population and debt overhang. 

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A Bad Case of the Blues

I don’t know about you, but it sure seems like there is an abundance of unhappiness right now. Just look at how quickly President Obama’s goodwill has faded. His latest approval rating is now at 51%, down from 70% just after his inauguration, while his disapproval rating has soared to 41%, up from 10%.

Combined with falling consumer confidence numbers, lackluster retail sales and the outrageous behavior of both politicians and protesters at those infamous health care town hall meetings, and you can just feel the frustration out there.

And it’s not just consumers and retail investors who are felling depressed and dejected.

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Professional inventors are feeling confused and nervous, too. Traditional investment strategies and asset allocation techniques no longer seem to apply.

Correlations between asset classes, such as equities, bonds, volatility and the U.S. dollar, link up and move apart with no apparent logic. Academic theories that are the cornerstones of the profession — such as portfolio diversification and market efficiency — seem outdated and archaic today. 

For these reasons, we’re seeing many large institutional investors reduce their equity exposure. From teachers in California to Dutch government employees and South Korean workers, pension plans around the world are becoming much more conservative. 

Insider Selling Is Also On the Rise

Corporate executives sell shares at the fastest rate since the middle of 2007 according to InsiderScore. In fact, companies dominated by sellers outpaced buyers by more than 2-to-1 — a ratio not seen since February 2007. 

With everyone so negative, our inner contrarian should be cautiously optimistic.

Don’t get me wrong. I’m not trying to be smug here or belittle legitimate concerns. It’s just that we need to be aware of what behavioral economists call “frame dependence,” which refers to the importance of state of mind when receiving information. 

Based on seasonality, the new month could be difficult. We’ve talked about how August and September are historically tough for stocks. Home prices will resume their downward slide as the peak buying season ends just as a wave of 2.3 million new foreclosures hits the market. Auto sales will be pressured as the new model year rolls out.

And worst of all, Congress is back in session in early September, and Congressmen are likely to talk again about raising taxes.

I’m not too worried about it, though. Remember that because of the nature of the recession, the consumer will surely lag the eventual recovery. Indeed, Deutsche Bank economists led by Joseph LaVorgna remind us that businesses, not consumers, will be responsible for reigniting GDP growth in the next few months. 

The main driver will be a rebuilding of inventories, which declined $141 billion last quarter and are estimated to expand by at least $60 billion in the current quarter. According to LaVorgna’s calculations, this alone will be enough to add a full 2.5% to economic output in the third quarter. Another unexpected boost will come from companies replacing old personal computers so that they can upgrade to Microsoft’s new operating system, which many believe will be a surprise hit.