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Stock Strategist

Second Quarter in Stocks: Buyout Binge Boosts Bulls

But interest rate worries also build.

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Stocks continued their rally from the end of the first quarter into April and May. The markets appear to be sputtering in June, but unlike in late February, another tumble in Chinese stocks at the end of May caused barely a ripple on U.S. exchanges. Moreover, the problems of subprime loans, a continuing housing slowdown, and high energy prices haven't spooked the rest of the economy, which is still solid, though slowing. The Morningstar U.S. Market Index was up 5.2% for the trailing 13 weeks through June 22, and is up 7.6% for the year.

Contributing to the subprime and housing issues were sagging bond prices and higher yields, leading to higher mortgage rates. (Bonds offer a fixed coupon, so their yield--the coupon divided by the price of the bond--rises as bond prices fall.) The Lehman Brothers U.S. Aggregate Bond Index shed 1.62% (nearly all its year-to-date gains) for the quarter through June 21. The bond sell-off pushed the yield on the 10-year U.S. Treasury note to 5.2%, up significantly from the 4.6% range in early March. Investors anticipated that Federal Reserve Chairman Ben Bernanke would hold the line on interest rates as he balances the pressures to lower them in response to a softening economy against the pressures to raise them due to inflation, including higher energy prices. As a side note, Bernanke's still-influential predecessor, Alan Greenspan, moved his employment address from Washington, D.C., to Newport Beach, Calif., taking a consulting post with bond manager PIMCO.

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

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