The stock market started out in early October with the bears taking control again.

Most major stock market indexes began a free-fall in early October, reversing their bullish finish at the end of September.

There was no real catalyst for the abrupt change in investors’ sentiment in early October from bullishness to bearishness. The economic new continued to depict a slow growth economy with rising mortgage interest rates and energy prices up significantly for 2005.

By mid October the bears ran out of steam and as such, most major stock market indexes turned upward as the bulls again regained the upper-hand.

You would think with the next Federal Reserve (Fed) meeting on November 1st, just around the corner, that stock market investors would have been more cautious leading up to their next meeting.

The Fed has been raising

short-term interest rates since June 2004, in order to thwart the potential for inflation to escalate in the economy.

The Fed has been concerned that with energy prices on the rise in the past couple of years that inflationary pressures would rise throughout the U.S. economy.

Ironically, the bond market has all but ignored the Feds’ campaign to raise short-term interest rates. Bond investors control mid and long-term bond prices and yields, the Fed controls short-term interest rates.

Normally, when the Fed raises short-term interest rates, bond investors sell off long-term bonds, raising interest rates.

However, even after the Fed has raised short-term interest rates more than a dozen times since June of 2004, most long- term bond yields remain about where they were at that time.

December remained a battle between the bulls and the bears

with most major stock market indexes finishing 2005 with little if any gains.

The Feds’ last meeting on December 13 set the stage for the decline of most major stock market indexes as 2005 came to an end.

2005 ended with short and long-term interest rates about the same, which often predicts a recession ahead. Of course, most Wall Street economist shunned the thought of a recession ahead as they usually have in the past.

The War in Iraq continued with no respite from the daily carnage on our troops and the Iraqi population.

The best performing sectors in the financial markets in the U.S. last year were energy, precious metals and commodities.

I remain committed to these sectors for the portfolios that I manage for my clients in 2006.