A Modest Year

Record Buybacks in 2005 Failed to Spark Big Rally

The energy sector, buoyed by high fuel prices, led stock market performers. (By Joe Marquette -- Bloomberg News)

NEW YORK, Dec. 29

Absent an unlikely major rally, Wall Street will close out the trading year on Friday with modest gains, well short of what many strategists predicted when 2005 began.

The tepid 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, which 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 Dow Jones industrial average is essentially unchanged this year. It closed at 10,784.82 on Thursday, down 11.44 points, or 0.1 percent, from Wednesday. The Dow is now a mere 1.81 points higher than it was on Dec. 31, 2004.

In contrast, the Dow Jones Stoxx 50 index of European shares is up more than 20 percent this year, and the Dow Jones Asian Titans 50 index of top Asian companies is up 19 percent. Large amounts of capital, much of it from abroad, also poured into Treasury bonds this year, helping keep long term rates low even as the Federal Reserve pushed up short-term rates.

The broader U.S. stock market fared somewhat better this year than the industrials, which were dragged down by faltering giants such as General Motors Corp., down 52 percent for the year. The Standard & Poor's 500-stock index on Thursday closed at 1254.42, down 3.75 points, or 0.3 percent, for the day but up 3.5 percent for the year. That is much less than many expected, especially considering the amount of corporate stock-buying.

The technology-heavy Nasdaq composite index closed at 2218.16 on Thursday, down 10.78 points, or 0.5 percent, and up only 2 percent for the year.

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 is up about 10 percent this year.

In the Washington area, software firm MicroStrategy Inc. said in June that it would buy back up to $300 million worth of its stock. The company bought back 2.5 million shares in the first half of the year. MicroStrategy's share price is up around 40 percent this year.