- Friday's US unemployment report showed private businesses added jobs while the government continued to shed workers.
- Adding this to other recent evidence should lighten the impact socialism fears have had on investor sentiment for quite some time.
Friday, headlines widely reported supposedly lousy US unemployment results. This allegedly spells "certain" changes in the control of the House and locks in more quantitative easing from the Fed. But despite the headlines, stocks rose nicely—stocks rising on such dour headlines was an unlikely occurrence during Q2's correction. Are stocks done being jittery on lingering high unemployment? Perhaps this story is starting to lose its punch, or perhaps investors looked beyond the headline (or a mixture of the two). We'll not spend much time here rehashing why high unemployment won't slow the economy or market. But the report should also speak to those with a bigger fear—the US morphing into the USSA (United Socialist States of America).
For some time now, many Americans have feared our country is turning into a socialist enclave despite widely available evidence socialism doesn't work. While many of these fears were partially disarmed by watered-down legislation, Friday's unemployment report adds further to evidence the fears were (and still are) overblown. Private companies added jobs in each of 2010's nine months (64,000 in September, 863,000 in 2010 thus far) while government (federal, state, and local) cut employment. In fact, local government employment today is at levels not seen since 2006. The federal government's temporary census staffing peaked in May at over half a million jobs—and has been cut each month since with only about 7,000 jobs remaining. (In other words, government has led in layoffs for much of the year). Of late, the media has pointed to this same trend of declining government employment in Cuba as a sign of increasing capitalism, but the same reporting of US government employment reductions is hard to find.
This isn't the only sign we're not becoming North Korea, Cuba, or Venezuela. GM and AIG, bailed out by the government during the recession, both announced plans to repay the government by issuing shares to the public—accessing capital markets and allowing the government to liquidate its stake. Translation: It's a conversion of government ownership to private investor ownership. And socialism isn't big government spending or increasing debt levels—it's the government directly owning the means of production—which these plans run entirely against.
Also, the Troubled Asset Relief Program, a means by which the government took an equity stake in many financial (and some non-financial) institutions closed to new business last week. Many financials have already repaid the government's investment—reducing the level of government involvement in the economy.
And last, but not least, US midterm elections are fast approaching, with gridlock a likely outcome—a plus for stocks. In fact, even if the Republicans simply increase seats without gaining control of Congress, their increasing numbers would enhance their ability to filibuster bills.
In the end, this evidence speaks to leadership similar to what the US has routinely had—one in which too many politicians focus (largely for popularity reasons) on demand-side economics and not enough on supply-side. This demand-side bias (which the US has had many times in the past—consider the New Deal's extremity in this regard) is the likely source for politicians bemoaning unemployment. Demand-side capitalism is not socialism—but it is a misunderstanding regarding economics. An example: How can the rapid growth of the internet and smart phones be explained from a demand-side perspective? We strongly doubt many consumers demanded email, websites, or mobile applications before they existed—the new supply created demand.
While lingering high unemployment is trying—financially and emotionally—for those impacted, under the report's surface rays of light exist. It rather clearly hasn't slowed the consumer much lately. And from an investor sentiment perspective, socialism fears have contributed to heightened risk aversion the last few years in no small measure. As evidence continues to mount the US isn't at all likely to become Cuba, expect risk aversion to wane further. For equity investors, it's critical not to wait for complete clarity. Buying while others still carry lingering fear and doubt is wise when those fears lack evidence—those same fears are helping make stocks cheap.