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Morningstar Market Commentary: Third Quarter 2007

Rate cut revives equities after volatile quarter.

Sanjay Arya, 10/15/2007

Markets had an eventful and volatile third quarter that ended on a high note. Mounting subprime mortgage defaults led to a crisis in debt markets. The paralysis in debt markets forced many investors to sell stocks and other assets to raise cash or shed risk. In a strong move to prevent the spillover of financial turmoil, the U.S. Federal Reserve cut its key interest rate by half a percent. The rate cut instantly revived equities, allowing the Morningstar US Market Index to climb back in positive territory and finish the quarter with a 1.7% gain.

In our quarter-end review, Morningstar Indexes research analyst Arijit Dutta provides insight into the market's performance. A recap of some of the key observations:

  • Growth beat value and large caps outshine small caps. Growth stocks were by far the better slice of the market, and large-cap stocks were the only ones to finish with positive gains as a group.
  • Investment grade bonds proved their worth. The Morningstar Core Bond Index gained 3.4% in the quarter; virtually all the gains came prior to the interest rate cut announced by the Fed.
  • Commodities had an explosive quarter. Global supply-demand conditions and investors' flight to real assets contributed to a stellar performance for commodities. The Morningstar Long-Only Commodity Index surged 12.6% for the quarter. 

Sanjay Arya is director of Morningstar Indexes.

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