After surging 7.81% in April, equity mutual funds rose 7.09% in May, Lipper reported Tuesday. This marks the biggest two-month rally for equity funds since late 1999, when they rose 16.4% between November and December.

The best-performing fund category in May was small-cap, which rose 9.35%. It was followed by mid-cap funds, which were up 8.47% and multi-cap funds, up 6.94%. However, hurt by holdings in technology, retail and health stocks, large-cap funds rose an average of 5.19% in May.

Despite the strong market rebound, the U.S. economy still is not showing signs of revitalization, Lipper noted. Durable good orders fell 2.4% in April, retail sales excluding automobiles dropped 0.9%, industrial production was down 0.5% and the unemployment rate rose 0.2% to 6.0%.

Equity prices rose on improved earnings reports, but those were primarily due to cost-cutting rather than revenue growth, Lipper said.

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