Stock Market News for November 2005

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Stock Market: Inflation Worries & Oil Prices Overshadow Profit Reports
As October drew to a close, inflation worries hovered, overshadowing some strong profit reports. Wall Street experienced some turbulence as mixed economic data fueled inflation fears. The consumer price index (CPI) increased 1.2 percent in September, registering the sharpest monthly increase since 1980. However, core CPI numbers (which omit energy and food prices) achieved better results than expected rising only 1 percent, as did September’s retail sales (excluding autos), which showed a 1.1 percent increase over August. Taken altogether, these various reports suggest that consumers are hanging in there despite oil prices and the impact of the two recent hurricanes.

Investors were greeted with the unnerving spectacle of a leader in the financial services industry hitting the skids in mid-October. This news is unlikely to inspire confidence in tough times, although securities regulators insist that the financial market will not be adversely hit by Refco’s fate. The giant commodities and financial services company folded in mid-October just two months after going public amidst charges of securities fraud. Leading institutional investors bought Refco stock despite disclosures in the prospectus of major deficiencies in Refco’s reporting and internal financial controls.

Corporate earnings posted for the third quarter by some of the nation’s largest companies - including stellar results from technology sector stars Google and SanDisk - were for the most part positive. Despite these preponderantly favorable third-quarter results, the market remained mired in concerns over rising interest rates, inflation and energy prices. Investors continued to react rather than to respond strategically to economic news, creating a pattern of seesawing trends.

Price Escalation
Some investment experts believe that the market needs a jump-start to get optimism flowing again. They think this may be accomplished if oil prices continue to decline - some suggest that a dollar price range in the mid-fifties per barrel would be sufficient to generate more optimism. Investment professionals who believe that price escalation has been confined to the energy industries are concerned that the Federal Reserve is raising interest rates too high at a time when oil prices appear to be declining. Others believe that the retail sales reports vindicate the Federal Reserve’s current strategy. Despite criticism from some quarters, the central bank appears to be committed to stay on course, raising rates as part of the Fed’s strategy to prevent the inflation in the oil industry from spreading into the mainstream.

While acknowledging the resilience of consumer spending in September, some economists note that consumers are not optimistic, according to the Index of Consumer Sentiment produced by the University of Michigan. The Index shows a further decline in consumer optimism of 1.5 points in October from September’s 76.9 - which marked a sharp decline from 89.1 in August. Many economists are concerned that Americans are spending all their disposable incomes - an unsustainable pattern - and that energy prices, especially higher heating oil prices, will take a major toll on lower- and middle-income households.

Optimists believe that consumer resilience will continue through the Christmas holiday season. Some retailers are not quite so ebullient, and several have chosen to launch their holiday promotional efforts early to get shoppers in the stores before heating bills start hitting their mailboxes.


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