The idiom that "politics makes strange bedfellows" is well known.  We'd like to amend it today, however, to simply read "politics is strange."

George Papandreou said he would step down as Greece's prime minister if he won a confidence vote in parliament.  Well, he won that vote by a very narrow majority, clearing the way supposedly for the formation of a "unity government" that would approve the EU bailout plan and then give way to new elections early next year that are likely to expose the disunity in Greece.

Then, there is Italian prime minister Silvio Berlusconi, who is the equivalent of a cat with nine lives.  He is rumored to be fighting for his political life again today and it is clear the capital markets would like to see him lose that fight.

Rumors that Berlusconi would resign today have sent Italy's stock market noticeably higher (+1.3%) and have helped turn a selling tide in Italy's bond market that saw the yield on its 10-year Note surpass 6.60%.   The yield currently sits at 6.48%, but that is a moving target if there ever was one these days.

It would be remiss not to add that Berlusconi subsequently denied the rumors that he would be resigning.  In doing so, he took the steam out of the resignation rally, yet things haven't completely fallen apart again, suggesting there is still hope Mr. Berlusconi's days in office are numbered.

We haven't even touched on U.S. politics, and we won't here, but the fact that the "Super Committee" deficit reduction negotiations seem to be an afterthought right now goes to show how intriguing, how insane, and how strange the political dealings in Europe are at the moment.

That longwinded introduction gets us to our main point:  all of this volatility -- headline or otherwise -- can drive an investor nuts if they choose to get caught up in it.

It was the headline hysteria that blinded the market to the idea that the U.S. economy was holding up reasonably well in the third quarter.  Moreover, it seems to have blinded the market to the reality that corporate earnings growth remains strong.

No one knows with any certainty what the future holds, so at abnormally volatile times like this, we feel investors are better served focusing on numbers that support long-term planning needs.

To that end, we will continue to emphasize our view that there is tremendous relative value in the equity market for long-term investors vis-a-vis Treasuries.

That view is supported in part by the Federal Reserve's efforts to hold down long-term rates, but it is rooted in the understanding that there is an opportunistic spread between the forward four quarter earnings yield for the S&P 500 (8.36%) and the yield on the 10-year Treasury Note (2.04%).

Over the last 16 years, that spread has averaged 150 basis points.  Today it stands at 632 basis points.  The high risk premium reflects the heightened degree of uncertainty at the moment.

On a trailing twelve month basis, the spread between the earning yield and the 10-year yield is 559 basis points, which is at its widest point in nearly 40 years.

Based on a dataset compiled by Robert Shiller that dates back to 1871, a trailing twelve month reported earnings yield greater than 4.0% has typically correlated to a positive real return for the S&P 500 over a forward 10-year period.

We understand the difficulty in trying to see past the near-term horizon.  That myopic hurdle was present in March 2009 as well, yet the S&P 500 has surged 88% in the interim period excluding dividends. 

There are bound to be pockets of unsettling weakness in the equity market, but that was a lot of missed opportunity for anyone who stood transfixed by the headlines that made things sound stranger and more dire than they turned out to be.

The S&P futures are currently 0.3% below fair value, signaling a slightly lower start for the cash market.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service.  To request a free trial, please email researchsales@briefing.com.