Nervous investors send Dow to a loss
High energy prices and a slowing economy gave investors pause in 2005. Other U.S. indexes posted only modest gains.
By wire services
Published January 2, 2006
Investors marked the last trading day of 2005 on Friday with the same conundrum they faced all year: trying to find a good reason to buy stocks and coming up short. Stocks fell to December lows, and the Dow Jones industrials finished the year with a loss.
With little news to spur buying, stocks fell as investors consolidated their meager profits on the year. As a result, the Dow suffered its first down year since 2002, although the other major indexes posted modest gains for 2005.
This year was marked by skyrocketing energy prices, a slowing economy, hot-and-cold inflation threats and the Federal Reserve steadily raising interest rates - all of which made investors nervous over the state of the economy and kept stocks volatile but ultimately little changed since the end of 2004.
High energy prices and their effect, real and potential, on consumer spending, inflation and corporate profits kept Wall Street on edge for much of the year, although investors' attitudes remained bullish. Wall Street bought heavily into each rally in 2005, but while the Dow flirted with the psychologically important 11,000 mark in March and November, caution ultimately prevailed each time and investors cut those rallies short to preserve profits.
For the year, the Dow fell 0.61 percent, while the S&P rose 3 percent and the Nasdaq gained 1.37 percent.
Much of those gains came in the fourth quarter, when November's rally, prompted by lower energy costs and the appearance of an end in sight to the Fed's interest rate hikes, caused eager investors to jump back into stocks. For the quarter, the Dow rose 1.41 percent, the S&P climbed 1.59 percent and the Nasdaq gained 2.5 percent.
Yet December was a difficult month for stocks, and the much-anticipated "Santa Claus" rally never really materialized as concerns once again arose over the Fed's policies and energy prices marched back above $60 per barrel. For the month, the Dow lost 0.82 percent, the S&P shed 0.1 percent and the Nasdaq fell 1.23 percent.
Of the Dow's 30 components, 16 lost ground for the year, with General Motors tumbling 51.5 percent and hitting a 23-year low in the process, to lead the 2005 losers amid concerns over bankruptcy.
Hewlett-Packard paced the winners with a 36.5 percent rally, boosted by a major restructuring program that included a $4-billion share buyback and 14,500 layoffs. HP narrowly edged out Boeing, which jumped 35.7 percent and reached a record in December, bolstered by the appeal of its Dreamliner jet.
The Nasdaq fell 1.2 percent in December, but managed to eke out a 1.37 percent gain in 2005 to 2,205.32. The index has advanced 65 percent during its three-year winning streak.
Among the Nasdaq's 100 biggest members, SanDisk Corp. was the top performer with a 152 percent gain as use of flash memory gained steam. Mercury Interactive was the biggest loser, shedding 39 percent as a regulatory investigation prompted the business software company to restate results and miss the filing deadline for its financial reports.
The S&P 500 Index managed a 3 percent gain for the year to 1248.29. The index has added 42 percent over the past three years.
The U.S. performance pales in comparison with its major overseas counterparts, as the United Kingdom's FTSE 100 rose 17 percent, Germany's DAX 30 climbed 27 percent and Japan's Nikkei 225 surged 40 percent.
The tepid U.S. returns come despite the emergence of a powerful group of stock buyers this year: companies themselves.
According to preliminary estimates, public companies bought back about $400-billion worth of their shares in 2005, shattering the previous record of $257-billion set last year.
Typically, such buying tends to lift individual stocks and the market as a whole. But that didn't happen this year. Analysts said that is because investors did not fully embrace stock buybacks as a positive signal about the strength of domestic companies. Many continued to ignore U.S. firms and instead put extra cash into international markets, real estate and government bonds.
"Historically, every year that companies were net buyers of shares, as far back as we have data, the market has gone up," said Charles Biderman, chief executive of TrimTabs Investment Research, a Santa Rosa, Calif., firm that monitors buybacks and mutual fund flows. "This year the market has gone up much less than it should have." The main reason, he said, is that individual investors put much more money into global equity funds than into U.S. funds. "As a result, global markets have outperformed."
The buybacks came from every sector of the market, led by giant companies such as Exxon Mobil Corp., which used cash generated by record high oil prices to buy back nearly $13-billion worth of its shares, according to TrimTabs. Exxon Mobil's stock was up about 10 percent in 2005.
Many stocks have not gained much after buyback announcements. Microsoft Corp. bought back about $9-billion in stock in 2005, according to TrimTabs, but its share price was nearly unchanged for the year.
Experts said the modest returns indicate investors did not embrace buybacks as much this year as they have in the past. Investors typically view buybacks as an indication that corporate executives are enthusiastic about the future and think shares in their firms are undervalued. In 2005, however, investors seemed to worry that buybacks might indicate that executives could not find more profitable ways to deploy cash, such as building new plants.
"The most direct inference that can be drawn is that companies are still somewhat cautious about how to redeploy their capital," said Steven Clark, a finance professor at the University of North Carolina at Charlotte.
Analysts said foreign-profit repatriation could be another factor driving buybacks. Under a one-year tax holiday, companies brought home $200-billion or more in foreign profit in 2005. The tax break forbids companies from using the money to buy back stock. But because they did not have to specify what they used the money for, analysts suggested some of the repatriated profit went to buybacks.
Information from the Associated Press, Knight Ridder Newspapers and the Washington Post was used in this report.