The third quarter started out with most major stock market indexes down for the year.

Fueling for the stock market bears during 2005 has been the Federal Reserve’s (Fed) relentless actions of raising interest rates at every one of its regular scheduled meetings since June 2004.

The Fed in its statement to the public at its June 30th 2005 meeting said that the Fed was still concerned about inflation building in the U.S. economy.

The Fed is concerned about the risk of inflation igniting again as crude oil prices have risen more than 50% since last year.

Crude oil has stayed stubbornly over fifty dollars per barrel throughout 2005 .


The last time the U.S. economy tangled with high crude oil prices was in the early 1980s.

At that time inflation and interest

rates soared. In that economic environment the U.S. economy stagnated. The economic term “stagflation” was first utilized then to describe the U.S. economy at that time.

Currently with rising interest rates, high oil prices, and huge Federal deficits, the U.S. economy is very similar to how it was in the early 1980s. This does not bode well for the stock market ahead.

Adding fuel to the fire for the bears in the stock market this year is the real estate boom that has taken hold in the U.S. economy. Even if the real estate boom does not end in a real estate bust as it has before, rising mortgage interest rates recently and the end of easy credit could slow the demand for real estate and push many overburdened real estate borrowers into default.

Even if there is no doom and gloom ahead for the U.S. economy it sure to slow as “cash out” financing from real estate

owners (a big source of consumer spending in the past few years) slows or dries up ahead.

Stock market investors should remain cautious with all the economic headwinds ahead in the U.S. economy.

The U.S. government can not borrow its way to solvency to prop up Social Security and Medicare, or magically produce more crude oil or gasoline. The War in Iraq is sure to go on for some time to come being funded by ever increasing debt.

The third quarter of 2005 ended with most major stock market indexes down for the year.

I remain cautious as to what is ahead for the overall stock market and as such, remain committed to energy stocks and precious metal stocks as the main components of the portfolios that I manage for my clients.