By Jerry Knight
Washington Post Staff Writer
Friday, December 30, 2005 6:03 PM
The closing bell clunked today as the stock market ended one of its most lackadaisical and lackluster years ever.
The Nasdaq Stock Market composite index gained just 1.4 percent over the past 12 months -- the smallest annual move since that index was invented.
The Dow Jones industrial average was down 0.6 percent for the year, setting another record for going nowhere.
The Standard & Poor's 500 stock index recorded a 3 percent gain, which means the average stock did better than either the blue-chip Dow or the tech-heavy Nasdaq. Still 3 percent--4.5 counting dividends paid by the S&P stocks--was a paltry payoff considering investors could earn more than 4 percent on certificates of deposit or government bonds.
In today's trading the Dow fell 67 points to 10,717.50, the S&P slipped 6 points to 1,248.29 and the Nasdaq composite dropped 13 points to 2,205.32.
Thumbing their noses at Wall Street strategists who encouraged their clients to buy stocks by predicting a "Santa Claus" rally, the traders who rule the market used the last week of the year to cash in what few profits they were able to make. In the process they drove down the market some more, leaving anyone still holding stocks with little to show for the year.
What went wrong? The weather was the worst thing. By slashing oil production in the Gulf of Mexico and trashing the economies of coastal states, hurricanes delivered a painful blow to the economy. As oil prices hit records, consumers began pulling in their horns and honking in derision at gas-guzzling sport utility vehicles. Detroit had a disastrous year: forced to bribe drivers to buy domestic vehicles, it still saw sales erode.
The Iraq war drained billions out of government coffers producing record budget deficits at the same time soaring oil imports gave the U.S. its worst trade deficit ever.
And the Federal Reserve's relentless increase in interest rates--which almost everyone agreed was necessary -- finally began to pinch.
Interest rates ultimately killed any hope of a year-end rally when a train wreck that Wall Street had seen coming for months finally occurred.
As the Fed boosted short-term rates over the past year, longer term interest rates, which are set by the bond market, refused to follow along. So many investors around the world are eager to buy U.S. bonds that the government could borrow all the money it needs without raising rates.
Usually rates on 10 year bonds are about 1 percentage point higher than rates on 2-year bonds. But the gap narrowed to a tiny fraction of a point and finally disappeared this week. On and off during the week, 2-year bonds were actually paying higher rates than 10 year ones.
Economists call that phenonomon an "inverted yield curve." They note that the last four times it has happened, the U.S. has gone into a recession. Wall Street insists this time will be different and maybe it will. But the threat of a recession ahead prompted many investors to cash in their stock profit gains this week, ending the year on Wall Street with a clunk.