2004 Market Recap: Playing Shoulda-Woulda-Coulda

Just about every physician-investorplays this game—figuring out howmuch richer you would be if only youhad known, on New Years' Day last year,what you know now. For example, if youcould have predicted that tossing a company'sCEO in the slammer would causethe stock to nearly triple in price, youwouldn't have hesitated to put some cashinto Martha Stewart Living, which gained194% over the year.

A little foresight would also have ledyou to dump those Krispy Kreme sharesbefore the stock took a 65% dive. Andwho would have guessed that a staid commoditymarketplace like the Chicago MercantileExchange would roar to a 216%gain last year?

The overall stock market struggled tokeep up its momentum in 2004, althoughthe bulls went on a tear in somesectors. The Dow managed just a 3.1%boost, while the S&P 500 gained a morerespectable 8.9%. Over at the Nasdaq,stocks were up 8.5%. Investors savvyenough to put their money into the stocksin the Dow Jones Transports Index, however,came away 26.3% richer at the end ofthe year, while the Dow Jones Utilitiesaverage climbed 25.5%.

Modest Gains

The broad market couldn't sustain thebig bull run of 2003, which saw the S&P500 rise more than 26%, but there wereseveral bright spots in the picture. Othersectors that did well included real estateinvestment trust stocks, which gained anaverage 32%, and the Russell 2000 SmallCap Index, which added 17%.

Santa Claus did pretty well for the marketsthis year, but it was November thatreally helped the fourth quarter bringsmiles to the faces of investors. The S&P500 rose 8.7% in the last 3 months of theyear, accounting for almost all of the year'stotal gain. The Nasdaq shot up 14.7% inthe last quarter, wiping out a loss over thefirst 9 months of the year. Ditto the Dow,which rose 7% in the last quarter.

The year's modest gains, coming ontop of last year's torrid returns, still didnot pull the markets up to precrash levels.The Nasdaq is still almost 3000 pointsshy of its all-time high of 5048.62, whichwas set in March 2000.

Election Market?

Although the markets had plenty toworry about during the year, includingthe war in Iraq, rising oil prices, and thethreat of inflation, the US presidentialelection clearly weighed on the mindsof many investors. The S&P 500 wasessentially range-bound until August,when it tanked in response to spikingoil prices and President Bush's laggingpoll numbers. In the weeks leading upto the Republican Convention in lateAugust, the market began to turnaround and picked up even more steamafter the convention.

Although the market dropped again,hitting the year's low in late October, itturned in a stellar performance fromthen on, especially after the election.Only some profit taking over the lastfew days of the year put the brakes onthe year-end bull run.

Looking Abroad

Investors who took to foreign marketsalso reaped some healthy profitslast year, helped by weakness in the USdollar, which made some substantialgains even better in dollar terms.Canadian stocks posted a 12.6% gainover the year, only slightly better thanthe S&P 500, but in US dollar terms, thatrepresented a 21.9% yield. Currency fluctuationsvs the euro turned a 27.7% gainin Ireland's stock market into a 37.9%yield in dollar terms.

Bonds defied gravity for yet anotheryear, as a predicted drop in bond priceswas a no-show. Despite several increasesin the fed's interest rate by AlanGreenspan, the rate on the benchmark10-year US Treasury note ended the yearat 4.29%, up a tad from its rate of 4.27%on Jan. 1, 2004. Investors who held 10-year Treasuries reaped a total return of5.1% for the year. Once again, junk bondsclosely matched the stock market in totalreturn, posting a 10.7% gain.

Mutual fund sectors that beat theoverall market included real estate (up31.9% for the year), natural resources (up28.6%), and communications (up 20%).Health care, despite being dragged downby troubled pharmaceutical stocks likeMerck and Pfizer, managed an 11.4%yield. Laggards included precious metalsfunds, down 7%, and technology, up just4.4% at year-end, despite a hefty 16.1%gain in the fourth quarter.

Most experts call for a continuation ofthe bull market for the coming year, butcaution that rising interest rates, inflation,and a slowing economy may put adamper on returns.