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Stock Strategist

First Quarter in Stocks: Market Sees Bear's Shadow

Volatility in Asia, subprime woes take market for a ride.

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T.S. Eliot once wrote that April is the cruelest month, but March 2007 hasn't been a picnic for investors. After the markets surged to start the year, Americans awoke on the morning of Feb. 27 to discover that, while they were sleeping, many Asian markets had plummeted roughly 9%. This precipitated a downturn in the U.S. markets, which was quickly exacerbated by a spate of bankruptcies among mortgage lenders specializing in so-called subprime loans. Stocks have since rallied off their lows, with the Morningstar U.S. Market Index recovering to a 2.3% gain for the year through March 22, though it's still in the red for the trailing four weeks.

As often happens when stocks sink, investors piled into bonds, raising their prices and sending the yield on the 10-year Treasury down to 4.6% through March 22 from its nearly 4.9% peak in late January. (Because bonds offer a fixed coupon, their yield--the coupon rate divided by the price of the bond--shrinks as bond prices rise.) The Lehman Brothers Aggregate Bond Index has returned 1.70% for the year, with nearly half of that gain coming in the past four weeks. Former Federal Reserve Chairman Alan Greenspan also contributed to the bond rally by wondering out loud about the possibility for a recession. Current Fed Chairman Ben Bernanke, for his part, hasn't clearly telegraphed whether he fears recession and will lower interest rates or whether he fears inflation and will raise them. Although bond rallies generally reflect pessimism and the anticipation of lower rates, not everyone fears that the subprime debacle will spur recession. Additionally, employment remains robust, and energy prices appear stable for the moment.

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

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