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Morningstar Market Commentary: Second Quarter 2007

Quarter ends on uncertain note after a strong quarter performance.

Sanjay Arya, 07/10/2007

Although markets posted strong second-quarter performance, the period ended on an uncertain note with many cracks appearing in the outlook.

The sharp rise in long-term interest rates through June forced investors to rethink the case for equities. Meanwhile, fear of rising inflation, worries of a deeper downturn in the U.S. housing market, and unease over possible fallout from leverage in the financial system all contributed to the debt market sell-off. The Morningstar US Market Index managed to end the quarter with a respectable gain of 6.2%. The Morningstar Core Bond Index, our newly launched flagship investment-grade bond index, slipped 0.6% during the same period.

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. A seven-year trend appears to be in reversal as growth stocks beat their value peers for the second time in as many quarters.
  • Large-caps revived. Large-cap stocks tied mid-caps for market leadership, beating small-cap stocks in a rare show of strength.
  • Active managers justify their keep. In another infrequent occurrence, active managers surpassed passive benchmarks in seven of the nine Morningstar style categories. 

Sanjay Arya is director of Morningstar Indexes.

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