We’re in a New U.S. Bull Market: Manager

AGF’s Tony Genua argues U.S. equities are on a rebound despite fears of a recession.

Michael Ryval 29 February, 2024 | 4:23AM
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Contrary to expectations, the U.S. economy has not slipped into a much-anticipated recession and has defied the experts with stronger-than-expected GDP growth. Indeed, the U.S. added 353,000 jobs in December, far higher than expected. Veteran stock picker and long-time student of markets and economies, Tony Genua is not surprised by this development.

“When it comes to the economy, we have been three months away from a recession for almost two years, ever since March 2022 when the Federal Reserve embarked on a path of raising short-term interest rates,” says Genua, lead manager of the 5-star neutral-rated $3 billion AGF American Growth Class Series F and senior vice-president at Toronto-based AGF Investments Inc., “The rise in rates created an expectation that the economy would slow down and perhaps enter recessionary conditions. But that has not happened.”

Backed by 45 years of financial industry experience, Genua argues that the impact of high interest rates was overstated. One key factor, Genua notes, is that the average household mortgage rate in the U.S. was locked in at 3.6%, versus 6.8% currently available. “Moreover, only 15% of U.S. households have a variable rate mortgage. So, they are protected against higher interest rates,” he says. Now that we have moved to higher rates, we are seeing that money market funds and certificates of deposit have gone up materially, “There are almost US$9 trillion in these assets,” he says, “And money market funds alone generate almost US$300 billion in interest income, which is more than the cumulative 10 years of interest payments and will help offset any impact from high rates.”

Consumers are Thriving Amid Fears They’re Surviving  

The U.S. economy has demonstrated resilience and last year averaged 243,000 jobs a month. “We started this year on a very strong note, with upward revisions in the last two months of 2023,” says Genua, adding that savings generated during the pandemic also boosted the economy. “Last but not least, let’s remember there is a wealth effect. We had a recovery in the stock market and housing prices have started to come back. In our opinion, we may see a slowdown, but it looks like we can avoid a recession---a position that we’ve maintained for about two years.”

Year-to-date (Feb. 22), AGF American Growth Class Series F has returned 10.98%, versus 7.69% for the U.S. Equity category. Genua has managed the fund since 2005 and earned top quartile status over longer periods. The fund returned an annualized 17.20%, 14.94% and 16.19% over 5, 10, and 15-year periods. In contrast the U.S. Equity category returned an annualized 11.77%, 11.52% and 13.69%, respectively. 

Genua maintains that we are in a new bull market and argues the case in an article entitled “We’re on the other side of the valley,” which appeared in AGF Fund Insight in January 2024. “We began with a trough in October 2022 and are actually in the second year of a bull market,” Genua observes, noting the bear market lasted almost two years. “In January 2024 we went above the level of the previous high, which was in January 2022.”

There have been 12 bull markets in the U.S. in the last 75 years, Genua notes, and there has never been a negative return in the second year of a bull market. “And if you look at almost 90 years of data, in the second year after the market goes down by more than 10%---which it did in 2022—eight times out of nine the market was positive in the second year. The only time it was negative, and even then modestly, was in 1939, which was the commencement of the Second World War. I like to have history on my side and consider any evidence from historical data that allows me to make more right decisions than wrong ones.”

Keep an Eye on Earnings First

In terms of what will drive markets higher, the single most important factor is earnings. “There is a 96 percent correlation. As long as earnings are going up, then the stock market goes up, historically. We could debate the valuations that the market attaches to those earnings, but the correlation is there.” In the second quarter of 2023, the S&P 500 Index reported a trough, in terms of a declining trend in earnings, which came to an end in the third quarter and showed year-over-year improvement in earnings.” With the fourth quarter results, which are coming in, we are continuing to see that, Genua argues, adding that in 2024, we can expect to see greater progress in corporate profits. “So we have turned a corner. Number one, the market is going up because history suggests it does go up, and fundamentals around earnings have turned around.”

Second, Genua points to the considerable liquidity that is sitting on the sidelines in the form of money market funds. “Any investor who wants to build their wealth and protect their assets against the ravages of inflation knows that---among traditional asset classes--- equities offer the best inflation-protected returns, followed by fixed income and then cash. Staying in cash for a prolonged period, while it may be comfortable, is not the way to protect a portfolio from inflation and to build wealth.”

Third, Genua argues that confidence will build through 2024. “The narrative will change from talking about a slowdown to talking about a global synchronized recovery. That will give investors the confidence that the period ahead will be much more comfortable to invest in.”

U.S. Economy’s Becoming More Service-Oriented, and Stronger

Most of the time the economy is expanding, Genua argues. Moreover, since 1945, the economic cycle has been getting longer in duration, partly because the economy is becoming more service oriented. “Services are less cyclical than goods. And the U.S. is one of the most advanced countries that depends on services,” says Genua. “While the amount of time that people talk about recessions is high, the actual amount of time that we are in a recession is quite low--it’s less than 10% of the time. And I’ve looked at economic cycles going back to 1854.”

Still, Genua admits that geo-political developments could upset the trajectory of economic growth. “So far, we have not seen a broadening out of various conflicts. Not in the Ukraine-Russia war, nor Israel and Hamas. But what would keep me up at night is if they were to expand,” admits Genua. “I also think about longer-term trends that could be troubling for the global economy. One is if China is on a permanent lower-growth rate. Historically, China’s growth has translated into global economic growth.  But if that is coming to an end, at least as a main source, then we need to make an adjustment.” In addition, he is concerned about potential roadblocks to a rising stock market, in the form of rising fiscal budgets coupled with high interest rates, and high levels of entitlements in some developed countries. “So far, they have not materialized.”

Multi-Speed Growth Stock Strategy

From a strategic viewpoint, Genua is a bottom-up, growth-oriented stock picker, but one who adapts to changing times. For instance, as the COVID-19 pandemic hit in 2020, he rotated out of high-beta names and moved into stocks that would benefit from a slower-growth economy. The latter includes names such as Zoom Video Communications Inc. (ZM) and Teladoc Health Inc. (TDOC). Then, as the pandemic eased and the economy began to open up again, Genua leaned into more modest growth-oriented names, to protect against the downside of the market.

“As we felt more comfortable last year, and as inflation was coming under control, and that the Fed and other central banks would come to the end of monetary tightening, we rotated the portfolio back up to having more growth,” says Genua. “But it’s not growth that’s based on hype—and there has been a lot of hype around AI [artificial intelligence], for instance. Our companies are benefitting from AI and delivering results and above-average visibility [of earnings]. So far this decade, we have gone from high growth to modest growth and back to high growth as we feel comfortable with the valuations since the interest rate environment will not prove to be the headwind the way it was in 2022. People felt more comfortable with this last year, as we did. So, we rotated the portfolio back to high growth.”

Top Growth Sectors

From a sector standpoint, technology and industrials combined account for about 45.5% of the portfolio. That is slightly higher than the 39% for the combined technology and industrials weight in the S&P 500 Index. Otherwise, there is also 12.4% in healthcare, 10.6% in consumer cyclical, 9.5% in financials and 5% in communication services.

Running a high conviction portfolio of only 32 names, Genua mitigates risk by having at least eight of the 11 sectors represented in the S&P 500 Index. In addition, there are limits as to how much the portfolio can be over-weight in individual sectors. “We believe in a high conviction portfolio, but one that is also diversified within the sectors and between the sectors, and within the broader context of the 11 sectors that make up the benchmark,” he says, adding that his concentrated approach is buttressed by research by Hendrik Bessembinder, a professor at the W.P. Carey School of Business at Arizona State University, that demonstrated that over the period 1926-2022 shareholder wealth improved greatly when investors focused on a small number of high-performing stocks.

Put simply, Genua’s investment philosophy is to focus on market leaders. “I’m looking for companies that can deliver better-than-expected results because of their innovation or end-market demand translating into consensus that perhaps will be too low. I’ve been looking at the idea of companies that are meeting or even beating consensus estimates for quite a long time.” These companies tend to have above-average revenue and earnings growth and have managements that are shareholder-friendly.

Top Growth Stock Picks

While company policy prevents Genua from highlighting names in the portfolio, he does point to the top 10, which includes stocks such as pharmacare leader Eli Lilly and Co. (LLY), Intuitive Surgical Inc. (ISRG), a provider of robotic products designed to improve surgical outcomes, and Amazon.com Inc., (AMZN), the e-commerce giant.

Looking back at 2023, Genua admits that the funds’ relative performance was below average, as the fund returned 16.63%, compared to 18.62% for the US Equity category. But going forward, Genua is bullish: “Our expectation is that we are off to a terrific start in 2024. We have bounced back, from under-performance years, every other time, for almost 20 years. We expect this will be another year where we will bounce back from under-performance to an above-average performance, relative to our peers, and thereby give investors a good experience.”


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
AGF American Growth F60.77 CAD-0.66Rating
Amazon.com Inc194.43 USD-0.32Rating
Eli Lilly and Co946.60 USD1.33Rating

About Author

Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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