Financial markets were roiled in the second quarter of 2008, as the economy continued to slog through the worst credit crisis in nearly a generation and tried to acclimate to skyrocketing energy prices without yet showing the official contraction that is the hallmark of recession. After an initial surge and subsequent plunge, the Morningstar U.S. Market Index was registering a 1.7% drop for the trailing 13 weeks through June 27 and was down nearly 11% year-to-date.

Federal Reserve Chairman Ben Bernanke indicated an end to interest rate cuts in his effort to stimulate a slowing economy. For the moment, he appears equally averse to boosting rates in the face of incipient inflation, lest he choke off any potential recovery. The federal funds rate stands at 2%, down from 5.25% last summer, and the Fed announced it was holding steady on rates near the end of the quarter. Although the Fed kept the short-term interest rates that it controls relatively low, the bond market experienced a sell-off, driving longer-term yields up as it anticipated inflation and future rate increases. The Morningstar Core Bond Index dropped 0.9% for the trailing 13 weeks through June 27. Click here to read more.

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