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This is your pilot again

Regarding the “turbulence” in February, we seem to have found some smoother air but ask that you remain seated with your seat belts on. The radar is showing there is still some bumpy air ahead of us. We apologize for the uncomfortable ride. As always, our priority is making sure you reach your financial destination safely. The two prior announcements from the cockpit, Sorry for the Turbulence and The Turbulence Continues, reiterated what we wrote in our 2018 outlook, “our expectations are that stocks continue advancing, interest rates rise modestly, inflation remains subdued, and the dollar weakens.” We also said we expect a return to a more normal business cycle of booms and busts, which means higher market volatility. While that’s a good description of our flight so far, we need to constantly check our instruments and make sure nothing has changed our opinion. The latest instrument reading was Friday’s job report. The headline report was 313,000 jobs were added versus an expectation of less than 200,000. Certainly, that is a huge number that confirms a pickup in economic activity and hiring. We particularly focused on the increase in the workforce participation rate. The rate hit its highest level since mid 2010 and increased at its fastest growth rate in almost 20 years. Some background on the labor participation rate: the rate measures the percentage of able-bodied people working or looking for work. The catch with this number is that if you are unemployed and no longer looking for work, you drop out of the labor force. The rate has been in a steady decline since 2000. This is often referred to as part of the “new normal” and is explained as a byproduct of America’s aging demographic. The argument is that the baby boom generation is reaching retirement age. This will cause the labor force participation rate to continuously decline. We can’t deny our population is aging, but we’ve never bought into this decline as solely caused by aging demographics. Our belief is that a material amount of the drop in the participation rate has been due to able bodied workers not seeing enough of a wage benefit and choosing to work in the home or accept government benefits.

We are encouraged about this uptick in the participation rate. It supports our thesis that economic growth is picking up, pulling more people back into the labor force. It also indicates that while inflation rates may rise, they will not take off and materially slow down the economy. In our 2/28 briefing Must See T.V. we wrote that globalization and technology have increased the size of the actual labor force beyond domestic capacity. With the new jobs report, we add more supporting evidence to our theory – the domestic labor force has hidden employment capacity. Despite our economy being beyond “full employment” (unemployment below 5%), and supposedly no excess labor supply, wages only rose 2.6%. While not necessarily great news for workers, it’s great news for the economy and certainly for corporate profits. It shows a lack of inflationary pressure and therefore less need for interest rate hikes. This is often referred to as the Goldilocks Economy. Not too hot and not too cold. We expect more good jobs numbers in the months ahead and some wage growth. Unlike many of the doomsday pundits, we don’t expect sharp increases in wages and inflation. We believe there is far more labor capacity than headline unemployment numbers suggest. For now we continue to modestly overweight stocks and underweight interest rate exposure. Our overweight is mostly in European stocks due to more attractive valuation and higher relative GDP growth than domestic stocks. Our European overweight remains unhedged to further take advantage of a weakening U.S. dollar. Have a wonderful week. Just for fun, we’ll also try our hand at weather forecasting: tomorrow will be the last major snowstorm of the year and spring is just around the corner. The GreenPort Team

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