Mid-caps and energy lead the way; growth shows signs of life.
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Stocks ended 2005 with a surge, pushing all the Morningstar diversified equity categories firmly into positive territory. Mid-caps and energy-related issues are leading the way, and growth stocks are showing signs of life. The rally in equities continued for the third straight year after the bursting of the technology bubble sent stocks reeling from 2000 through 2002. The Morningstar U.S. Market Index rose 6.5% for the year, adding about 3% in the final quarter.
The market shrugged off debt downgrades at automaker General Motors
While influential financiers sometimes instigated these corporate events, legendary investor Warren Buffett characteristically remained content to leave the managers of his holdings alone. His company Berkshire Hathaway
Equity markets also mostly ignored political and macroeconomic problems such as continued difficulties in Iraq, the "twin" budget and trade deficits, surging oil prices, the Federal Reserve's interest-rate-raising campaign, and the destruction wrought by Hurricane Katrina.
Bonds, however, finally felt some of the Fed's pressure as they struggled to eke out gains, with the Lehman Brothers Aggregate Index up a modest 1.91% through Dec. 21. Nevertheless, a "flat" yield curve (little difference between short-term and long-term yields) bespeaks their continued resilience, which is keeping the housing market humming. Alan Greenspan's successor, Ben Bernanke, will have to manage this, as he seeks to curb inflation without halting growth. Homebuilding stocks such as Toll Brothers
Surveying the Sectors
Energy surged for the second straight year, leading all sectors and posting a 32.9% gain for the year. However, the sector stumbled in the fourth quarter, shedding about 6%. Many of the larger exploration and production companies faltered toward the end of the year. In the fourth quarter, ConocoPhillips lost 16.4% and ExxonMobil
Morningstar analysts have been modeling lower commodity prices for the future, leaving the list of 5-star stocks bereft of an energy representative, save Suburban Propane
Utilities finished as the second-best sector of the year, putting up a 14.6% gain for the year. The sector's strong multiyear run has also left it too rich to have a representative on the 5-star stock list.
Only media posted a loss for the year, as newspaper and radio stocks lagged. Nevertheless, analyst Jim Walden continues to find value in Dow Jones, New York Times
Although oil products companies such as refiner Valero
Paper companies such as Domtar
Although the market was up overall, high energy prices, interest-rate increases, and a flat yield curve (often signaling an economic slowdown) restrained stocks for most of 2005. Our Market Valuation Graph, which is available here, shows stocks as slightly overvalued, but the current 5-star list encompasses about 80 names, including some businesses that have earned Morningstar's wide moat designation for their competitive advantages: Abbott Labs
John Coumarianos is an analyst with Morningstar.