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Markets

Our Take on the Third Quarter

Stocks continued to climb over the summer as worries over higher rates, emerging-markets, and commodities mostly faded.

U.S. stocks continued their march higher in the third quarter. The broad-based Morningstar US Market Index was up 4.3% in the period. That index is now up 8.1% so far this year and up an annualized 16% over the past five years.

Investors were still trying to make sense of the Brexit vote as the quarter began, but that quickly fell into the background as the market was generally docile for most of the summer. The quiet was driven by a few factors. First, U.S. economic data that was strong enough to not worry about a recession, but no so strong that the Fed would be forced to raise rates. Secondly, fears around China and other emerging-markets that had been center stage earlier in the year eased. And finally, even though oil prices did bounce around they remained much higher than the levels seen at the start of the year.

Volatility picked up again toward the end of the quarter as the market reassessed the prospect of a rate increase and concerns over the health of

Morningstar's Quarter-End Coverage

Stock Market Outlook A Little Too Buoyant? The market overall looks slightly overvalued, with basic materials and energy the most overheated, and more value in healthcare and financial services.

Sector Outlooks Energy: Rally in the Works, but It Won't Last Long We expect a medium-term oil price rally in 2018 but remain bearish on long-term oil prices.

Financial Services: Berkshire Is Bigger Than Buffett Although the wide-moat firm is unlikely to grow book value like it did in the past, future returns should still come in solidly and consistently above the firm's cost of capital.

Consumer Defensive: A Handful of Values in an Overheated Sector Cost-cutting remains a focus amid continued slowing growth, but the sector is overvalued on the whole.

Consumer Cyclical: Poised to Perform in the Second Half With macroeconomic stabilization, cost-efficiency efforts, improved inventory levels, and a relatively healthy consumer, we are optimistic about the sector.

Basic Materials: China-Dependent Producers Largely Overvalued This year's credit-fueled increase in Chinese fixed-asset investment will prove unsustainable.

Healthcare: We See Value in the Drug and Biotech Industries Overblown concerns over drug pricing in the U.S. are creating attractive valuations for the more innovative drug companies.

Industrials: Weak Commodity Prices Weigh Despite short-term headwinds, not many companies are trading at material discounts to our fair value estimates.

Real Estate: Expect Some Choppy Waters Ahead Our real estate outlook remains stable for now and operating fundamentals continue to be healthy, but risks are due to increase as markets get deeper into the cycle.

Tech & Telecom: Opportunities in Smartphones and IT Services The tech sector looks overvalued overall, but investors can find some value in smartphone-related vendors and IT services leaders.

Utilities: How Long Can the Yield Paradox Survive?

Utilities' dividend yields still look good, growth is on track, and balance sheets are strong, offering income investors hope that a potential sector collapse would be mild.

Credit Market Insights Leaving Brexit Behind After initial Brexit-induced volatility, corporate credit spreads resumed their tightening trend over the third quarter.

Fund Spy Third-Quarter Winners and Losers Among U.S. Stock Funds Domestic equities continued to reach new highs.

Emerging Markets a Bright Spot in the Third Quarter It's been mostly more of the same for international-stock funds so far in 2016.

A Mixed Quarter for Interest Rates, but Credit Continues Its Rally The third quarter in bond funds.

Data Report Open-End Fund Category Returns Index Returns Download Data (Excel)

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