Wall Street rang up its second straight year of gains Friday, despite a weak showing by many of the stock market's best known names.
The blue-chip Dow Jones industrial average posted a modest gain of 3.2% for the year after closing out 2004 with a losing session in which it fell 17.29 points, or 0.2%, to 10,783.01. The Dow's 12-month performance was the poorest of any major U.S. market index.
By contrast, the Standard & Poor's 500 index, which slipped 1.63 points, or 0.1%, to 1,211.92 on Friday, gained 9% for the year. Including dividends, the S&P's return was 10.9%. The technology-dominated Nasdaq composite, which dipped 2.90 points Friday to 2,175.44, finished the year up 8.6%.
Among broad market sectors, shares of smaller companies were stars for a fifth consecutive year. The Russell 2,000 small-stock index jumped 17%.
Investors also gravitated toward many industry sectors that were benefiting from the economy's strength, including energy, transportation, steel, real estate and machinery.
The market's gains came in the face of sharply higher oil prices, an escalation of hostilities in Iraq and the Federal Reserve's first credit-tightening moves since 2000.
Given those negatives, "There's no doubt that the market has surprised a lot of people," said Barry Ritholtz, strategist for brokerage Maxim Group.
And the biggest surprise may have been that the broad market was able to power ahead even as many of the most revered large-company stocks of the last decade suffered steep losses.
Drug giants Pfizer Inc. and Merck & Co., both members of the 30-stock Dow, fell 24% and 30% in 2004, respectively. They were hit by safety concerns over key drugs.
Mortgage-finance leader Fannie Mae lost 5% for the year after regulators said it had used faulty accounting.
And in the tech sector last year, semiconductor titan Intel Corp. fell 27%, Cisco Systems Inc. dropped 20% and Hewlett-Packard Co. gave up 9%.
Howard Silverblatt, equity analyst at Standard & Poor's in New York, said technology in general suffered as investors balked at paying the relatively high price-to-earnings ratios that many tech shares sported at the beginning of 2004, after rebounding sharply in 2003.
"Investors are no longer willing to pay the exorbitant P/Es that dominated the market several years back," at the peak of the dot-com boom, he said.
But there were exceptions: Internet search engine Google Inc. captivated investors, who drove the stock up 127% from its initial offering price in August to end the year at $192.79. The stock's P/E based on estimated 2005 earnings per share: about 57, compared with about 17 for the average S&P 500 stock.
Some analysts said it was a good sign for the market's longer-term health that investors hunting for intriguing stock ideas looked further afield than the classic blue chips.
In many cases, that search took investors overseas: The dollar's sharp decline against other major currencies helped boost foreign stock returns in 2004.
Measured in dollars, the Mexican market soared 48% last year, the Italian market gained 24% and the Japanese market rose nearly 13%.
Even though the Dow lagged most of its rivals, it still reached a 3 1/2 -year high this week. The S&P 500 and Nasdaq indexes also were at their highest levels since 2001, while many small-stock indexes were at record levels, surpassing even their peaks in 1999 or 2000, before the bear market of 2000-2002 began.
Still, there is concern that the market's advance was largely a "relief rally" after President Bush's reelection. Most stock indexes struggled for much of the year until late October.
It also helped that oil prices pulled back after reaching a record $55.17 a barrel Oct. 22. Oil futures ended the year at $43.45 barrel, though the price still was up 34% from $32.52 at the end of 2003.
Oil, the dollar and interest rates all loom as challenges for the stock market again in 2005.
The euro ended the year at $1.355, down slightly from its record of $1.365 on Thursday but up from $1.26 a year ago. The dollar ended at 102.79 yen, down from 102.97 on Thursday and 107 in 2003. If the buck's slide accelerates, it could unnerve global markets, analysts warn.
As for interest rates, a major surprise of 2004 was that long-term bond yields fell even though the Fed raised its key short-term rate five times, from the generational low of 1% on June 30 to 2.25% by mid-December.
The benchmark 10-year Treasury note yield ended 2003 at 4.25%, jumped as high as 4.87% by mid-June in anticipation of the Fed's shift to credit-tightening mode, then fell in the second half, finishing Friday at 4.22%.
A big question is whether bond yields can remain restrained this year if the Fed continues to tighten as expected.
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Source: Bloomberg News
How key stock market indexes performed in 2004:
*--* Dow transports +26.30% Dow utilities +25.5% Bloomberg REITs +24.8% S&P small-cap +21.6% Russell 2,000 +17.0% S&P mid-cap +15.2% NYSE composite +12.6% S&P 500 +9.0% Nasdaq composite +8.6% Dow industrials +3.2%