Although the powers that be have yet to officially decree it, the third quarter will likely represent the end of the recession. A year after the collapse of Lehman Brothers sent credit markets into a tailspin, the economy seems to have finally found its bottom and is now trying to dig itself out of a deep hole. The Morningstar U.S. Market Index rose 15.7% over the last three months through Sept. 29, bringing the year-to-date return to 21.6%.

Small-cap stocks once again outperformed the broader market, rising nearly 22% in the quarter compared with 21% for mid-caps and about 14% for large caps. Slicing the market by our economic moa ratting provides further evidence that smaller and lower-quality firms have been driving the rally this quarter. Over the last three months, wide and narrow moat stocks have returned 11.3% and 16.9% respectively, versus a 23.3% return for no-moat stocks.

The quarter was also marked by an apparent rekindling of greed in the marketplace as evidenced by the rebirth of both the IPO and merger-and-acquisition markets. Management teams clearly are gaining confidence in the economy and are willing to deploy their capital in ways that would have been unthinkable earlier this year. This is in contrast to the M&A boom at the end of the bull market, which was fueled more by cheap debt than by strategy. Click to read more.

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