The Year in Stocks: The Rally Continues
Year-end surge pushes equities firmly into positive territory.
Stocks are ending 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 6.4% for the year through Dec. 21, putting on about 3% in the final quarter.
The market shrugged off debt downgrades at automaker General Motors (GM), legal troubles and weak research pipelines at pharmaceuticals Merck (MRK) and Pfizer (PFE), struggling traditional media and newspaper stocks Time Warner (TWX) and Dow Jones (DJ), and airline and auto-parts bankruptcies. Difficulties at these businesses meant good news for rivals such as Toyota (TM), Google (GOOG), and Genentech (DNA). Additionally, mergers, acquisitions, and restructurings also supported equities. Among the bigger announcements and consummations were SBC/ AT&T (T), Procter & Gamble (PG)/Gillette, Chevron (CVX)/Unocal, and ConocoPhillips (COP)/ Burlington Resources (BR). Notable spin-offs included Expedia (EXPE) (from InterActiveCorp (IACI)) and CBS (from Viacom (VIA.B)). Morningstar analysts currently view Google as overvalued, but find newspapers and both InterActiveCorp and Expedia attractive.
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 (BRK.B) picked up shares of brewer Anheuser-Busch (BUD), home improvement retailers Home Depot (HD) and Kingfisher PLC, computer-printer maker Lexmark (LXK), and industrial conglomerate Tyco (TYC). Analyst Dreyfus Neenan views Berkshire as a bargain currently.
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 (TOL), Pulte (PHM), and Centex (CTX) suffered a fourth-quarter swoon, but still tacked on healthy gains for the year. None remains in 5-star territory.
John Coumarianos has a position in the following securities mentioned above: MSFT, DEO, BRK.B, TRP. Find out about Morningstar’s editorial policies.
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