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Market Update

First Quarter in Funds: Small- and Mid-Caps Lead Again

Equities surge, while bonds continue to founder.

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Equity markets surged in the first quarter, despite continued rising interest rates, fears of a housing bubble bursting, and threats of an economic slowdown. Small caps and mid-caps outperformed large caps, while international stocks outpaced their domestic counterparts. Both of these are familiar patterns. Bonds were weak, as they continued to feel the effects of the Federal Reserve's multiple rate increases for the second straight quarter, though high-yield (junk) and emerging-markets bonds continued their multiyear runs.

Equity Funds
The smaller the market cap, the better the performance for the first quarter of 2006. Among the diversified funds, small caps rallied the hardest, with small-growth, small-blend, and small-value adding 12.7%, 12%, and 10.8%, respectively. Mid-caps were right behind with growth, blend, and value adding 9%, 7.2%, and 6.7%, respectively. Interestingly, growth outperformed value in both market-cap ranges, perhaps signaling a rotation toward growth and away from value. Small-growth and mid-growth have outperformed their value counterparts for the past year now.

John Coumarianos has a position in the following securities mentioned above: HD, MSFT, BRK.B, JNJ, EBAY. Find out about Morningstar’s editorial policies.