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Mutual funds: Investors battle the bear

A stock-market sag spilled into the second quarter, leaving little to be gained.

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Dazed and more than a little squeamish. That describes the mood of many mutual-fund investors after navigating a second quarter that saw most stock funds wind up with few, if any, gains.

After a painful first quarter, investors were expecting stocks to stabilize and perhaps get out of the red in response to the Federal Reserve's concerted campaign to avert a liquidity crisis in the banking system.

But Wall Street's consensus view – that any recession would be short and shallow – faded in June amid rising joblessness, plummeting auto sales, and an upward spike in oil and commodity prices. Credit-rating downgrades on major bond insurers and analysts' predictions of additional asset write-downs by major banks sent battered financial stocks into another tailspin. Dismal consumer-confidence indicators triggered a broad sell-off in automotive and retail stocks.

The Federal Reserve decision to hold its key federal-funds rate steady in late June did little to assuage nervous investors that inflation would be reined in.

Investors had a severe "reality check" in June, when the Dow Jones Industrial Average sank to its lowest level in nearly two years, says James Awad, investment manager with W.P. Stewart, an asset-management firm. Hopes that the recession would be relatively mild and that the worst of the credit crunch was about over "were pretty well dashed," he says. Many investors now reckon the Fed is more likely to tighten monetary policy to dampen inflationary expectations and support the dollar rather than act to spur the economy.

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