The bear case is fairly compelling right now. However, it seems always to be compelling because it plays to our basic instinct of fear, which can often trump greed -- the other basic instinct driving stock prices -- fairly quickly and unexpectedly. This could turn out to be a good year for bearishly inclined chart technicians, but that's after getting it mostly wrong for the past six years. I track death crosses and other technical indicators, but I don't give them as much weight as I do the economic and earnings fundamentals.
The bull case hinges on whether the U.S. economy and earnings can continue to grow even if global economic activity continues to weaken. Of course, that's the bull case for U.S. stocks, and consistent with my stay home investment theme. It might even be bullish for eurozone stocks as long as the region continues to muddle along. However, it's hard to make a bullish case for the stocks, bonds and currencies of emerging markets, especially given the fairly convincing case for the unwinding of the global carry trade, particularly if the Federal Reserve does start to raise interest rates.
Here are the highlights of the latest economic indicators out of the U.S. and the eurozone:
(1) Boom in U.S. labor market. Believe it or not, there still are economists arguing that the U.S. labor market needs to make more progress before the Federal Open Market Committee starts to raise interest rates. Indeed, some of them are members of the FOMC, and one of them heads up the International Monetary Fund. However, the employment report for August that was released Sept. 4 was overwhelmingly strong, on balance, in my opinion.
My earned income proxy, which closely tracks the trend in private wages and salaries, rose 0.7% month-over-month last month, and 4.9% year-over-year. Granted, August's payroll gain was only 173,000, but it is bound to be revised higher as were the previous two months in the employment report. In the household survey, August's full-time employment exceeded the previous record high, set in November 2007. The unemployment rate was 5.1% last month, the lowest since April 2008.
(2) Crawling along in the eurozone. The volume of retail sales in the eurozone rose 0.4% month-over-month during July to the best level since February 2011. The bad news is that German factory orders declined sharply during July. However, German industrial production (including construction) rose 0.7% that month.
(3) China is the muddle kingdom. China might be slowing, but it isn't falling into a recession, in my opinion. The plunge in China's share prices since June 9 might be an ominous leading indicator of a worsening economic situation. More likely, it is the bursting of a bubble that has been inflating for a very short time, i.e., since November of last year.
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.
