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Stock Strategist

Third Quarter in Stocks: Volatility Returns to the Markets

Subprime and housing woes lead to wider asset repricing.

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Subprime mortgage worries and a general real estate meltdown led to volatility and a "repricing of risk" in the financial markets during the third quarter of 2007. In other words, investors reconsidered their previous attachment to speculative stocks and low-rated bonds, sending their prices down and effectively demanding greater yields, or returns, from them in relation to safer instruments. Still, the Morningstar US Market Index finished the volatile trailing 13 weeks through Sept. 25 with a modest gain of 1.4%, and it remains up a healthy 8.7% for the year.

Volatility didn't visit all stocks equally. While mortgage companies like  Countrywide (CFC) endured breathtaking plunges, despite a capital injection from  Bank of America (BAC), non-financial large-cap stocks generally outperformed their small- and mid-cap brethren for the trailing 13 weeks through Sept. 25. The Morningstar Large Growth, Large Core, and Large Cap indexes finished in the top six diversified slots, posting modest gains. By contrast, the Morningstar Small Value and Mid Value indexes, the darlings of the past few years, brought up the rear, shedding 7.0% and 6.6%, respectively, for the trailing 13 weeks.

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