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My boss and I will invest this year's special tax rebates in big-screen TVs, which is exactly the kind of frivolous spending Congress had in mind when it created them.
Thriftier souls -- who, surveys indicate, account for roughly half the country -- will use the money to pay bills and boost savings.
And the smartest folks will invest their rebates. The last time a Bush administration recession (in 1990-91) was followed by the president's exit, markets rallied hugely, led by the most downtrodden group, financials.
And it's déjà vu all over again, as financials tumbled nearly 40% last year and this year before staging an April 1 rally, when they shot up 7.2%. Before, it was the savings-and-loan crisis; this time, the subprime mess. Each time, overreaction on Wall Street tends to be followed by an overreaction that is equal and opposite.
If history is any guide, other beaten-down groups are destined to become leaders when the next bull market begins. So if you want to turn the relative pittance the government is going to throw your way into a meaningful sum, consider this portfolio, which I predict one year from now will have run rings around such recent leaders as gold, petroleum and corn.
| Sector | 1991-92 return |
|---|---|
Financial | 119.2% |
Technology | 65.3% |
Small-cap value | 62.4% |
High-yield bond | 57.5% |
Municipal bond | 36.3%* |
Source: Morningstar |
*Taxable equivalent at combined 40% federal/state marginal tax rate of actual 21.8% return.
T. Rowe Price Financial Services (PRISX). Morningstar's favorite no-load fund in this category sank 9.4% last year and, as of March 31, was already down 12.9% in 2008. More commonly, though, the fund is a top-quartile performer, managed by T. Rowe's ace picker of financial stocks, Jeff Arricale.
One of the prime attractions of this fund in normal times is that it puts a third of assets into midsize stocks, a handsome group with which T. Rowe has proved particularly adept. What makes it especially timely now is that many of the most distressed names are among its top holdings, from Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs) to Fannie Mae (FNM, news, msgs) and Freddie Mac (FRE, news, msgs).
Stocks such as these got the market into its current mess, and the market won't emerge until they do.
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Turner New Enterprise (TBTBX). In the volatile technology sector, this is a particularly volatile representative. It had dropped 19% this year, as of March 31, but gained more than 20% in each of the past five years. Lead manager Christopher McHugh runs a concentrated portfolio of issues he expects to deliver the biggest profits going forward.
According to the fund's most recent public reports, such names include Google (GOOG, news, msgs), down 36% this year, and Genzyme (GENZ, news, msgs), which has been marginally better. But McHugh trades heavily -- turnover is nearly 200% -- and packs half his assets in small and midsize companies.
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Royce Opportunity (RYPNX). As I reported last month, this small-cap value fund had been closed to new investors, but it reopened after slipping 2% last year as its group fell far from favor. Over the past decade, however, the fund is the very best of its peers, with annualized returns of 12.6%.
Managers Boniface "Buzz" Zaino and William Hench run a hugely diversified (280-plus names) contrarian portfolio. At the end of last year they had nearly a quarter of assets in computer hardware stocks, more than three times the weighting of their average peer. Despite this, the average capitalization of its holdings is about $550 million, among the lowest of its group.
Continued: 2 more attractive funds
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