Stock Market News for October 2005

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Stock Market: Storms and Oil Price Hikes Erode Confidence
Although the damage caused by Hurricane Rita across parts of Texas and Louisiana at the end of September appears to have been significantly less than Hurricane Katrina’s deadly August rampage, the good news failed to generate much cheer on Wall Street or to negate the continuing escalation in oil prices.

Major indexes fell back in late September as the Gulf Coast braced for another major hurricane. The ensuing post-storm rally lasted just a few hours before other serious economic considerations took their toll. Although the Gulf Coast’s refineries and facilities escaped the damage that had threatened earlier, the storm still forced gas prices higher, and industry analysts see no relief in sight. Oil prices are expected to remain significantly higher than their historic norms with average gas prices expected to exceed $3.00 per gallon for some time. Reluctant to forecast when we might see gas prices decline, oil industry experts have warned that heating bills can be expected to skyrocket this winter.

Not surprisingly, consumer confidence took a huge tumble - the biggest in almost 15 years - in September. The 19-point drop in the Conference Board’s consumer confidence index - to 86.6 -
was almost double the decline predicted by many economists, and a more substantial drop than the one seen after 9/11. According to a Conference Board spokesperson: "Hurricane Katrina, coupled with soaring gasoline prices and a less optimistic job outlook, has …created a degree of uncertainty and concern about the short-term future."

Short Term Impact
The financial markets were braced for a decline, and stocks moved only slightly lower following the release of the Conference Board report. Investors can also take some comfort from the knowledge that shocks and violent events historically have had a short-term impact on share prices. On the upbeat side, some analysts believe that the downturn in confidence may have some lingering effects, but will create no lasting damage. Some market observers also note that consumer spending has remained relatively strong - and inconsistent with the recent consumer confidence ratings. They believe that the fourth quarter spending will be soft but that employment growth will restore consumer spending levels in 2006.

On the other hand, some analysts see longer-term problems ahead. The bears believe that recent weather disasters, escalating oil prices, and the ensuing decline in consumer confidence will drive the market lower in the third quarter - a seasonally weak period - and that the stock market will continue to suffer into 2006. They think that we are seeing the end of the bull market run. They suggest that a closer look at the performance of major market indices during the market’s sideways drift in 2005 reveals that bearish reversal patterns are already in place.

Thanks to Katrina and Rita, investors are faced with doubtful economic data throughout the rest of the year. Both bulls and bears acknowledge that oil prices remain the wild card, and that no sector is going to really improve its market performance until the energy markets become calmer. Oil prices have already exceeded their historic peaks, but they may keep rising for some time. Many believe that oil prices of $70 or more are unsustainable, and there is a strong likelihood that oil prices will fall. Of course, no one knows when that might be. Until that time, we can expect escalating gas prices to continue to hurt the stock market, with the impact felt across almost all sectors - with the exception of utilities and health care to date.

From an investor’s standpoint, these are tough times to make informed decisions. Consult your investment advisor to determine if it makes sense to develop a longer term strategy to leverage the probable correction in oil prices. This is not the time for impetuous action, but it may be time to readjust your portfolio if you are heavily loaded up on energy stocks or, if you’re not, to add a natural resources fund as a hedge against inflation.


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