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Market Update

First Quarter in Stocks: Equities Still Climbing

Small caps, energy continue their surge.

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Stocks picked up in the first quarter of 2006 where they left off in late 2005, posting solid gains in the face of economic uncertainty and potentially setting the stage for a fourth straight year of equity gains following the brutal bear market from 2000 through 2002. All Morningstar diversified equity indexes were higher for the trailing 13 weeks through March 22, as small caps led the way in what is now an all-too-familiar pattern. Those anticipating a rotation to large caps will have to wait a little longer, since investors apparently haven't quite lost their affinity for smaller stocks. The Morningstar US Market Index rose 5.6%.

The market weathered additional debt downgrades and intensified solvency questions for embattled automaker  General Motors (GM), continued weakness in newspaper and traditional media stocks, such as  New York Times (NYT) and  TimeWarner (TWX), and even weakness in online search-engine  Google (GOOG), whose meteoric rise had previously been cited as the proximate cause of traditional media's recent swoon. Additionally, weakness in the newspaper industry encouraged  McClatchy (MNI) to purchase  Knight Ridder (KRI). Newspaper stocks such as  Tribune (TRB), New York Times, and  Washington Post (WPO) continue to populate Morningstar's  5-star stock list, and media spin-off  CBS (CBS) also appears undervalued to us. Analyst Jonathan Schrader thinks traditional media is ripe for a rebound, but Google still looks expensive to us.

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