Last Year, Stocks And Profits Were Off the Charts

Purchases by private-equity firms -- the new name for leveraged-buyout companies -- reached $737.4 billion, double the previous record set in 2005, and included the two largest ever: Blackstone's $36 billion purchase of real estate company Equity Office Properties Trust and the $32.7 billion buyout of hospital giant HCA by a group including Bain Capital, Kohlberg Kravis Roberts and Merrill Lynch Global Private Equity.

Analysts say these deals help pump up overall stock prices by freeing cash that investors can put back into the market and by sparking speculation about which companies might be likely acquisition targets.

Though consumers shopped and shopped some more, giving top gains to companies such as Harley-Davidson, Big Lots, McDonald's and Walt Disney, they also were more picky. They scooped up flat-panel TVs after Wal-Mart lowered prices, forcing competitors such as Circuit City to follow, while leaving higher-profit items behind.

Even as consumers insisted on steep discounts on electronics, they were willing to splurge on other luxury goods. Tiffany, for example, reported that its biggest increase in sales was for jewelry with a price tag of $20,000 or more.

Strong sales, however, were not the sole factor determining how some companies fared. General Motors, for example, was the Dow's top performer even in the face of declining U.S. sales, a sign investors are gaining confidence in its restructuring efforts.

Wal-Mart and Whole Foods Market, on the other hand, were among the worst performers, as investors questioned their ability to grow as quickly as in the past. So were a trio of technology companies: computer chipmaker Intel and Internet giants eBay and Yahoo.

Information technology was one of only two of the S&P 500's 10 industry sectors to miss double-digit gains for the year. Analysts say there's a debate among investors over whether big technology companies are underpriced or whether those prices signal that their days of gangbuster growth are over.

The other slow-growing S&P sector was health care, hurt by fourth-quarter declines in several areas, including pharmaceuticals. Drug companies have been bedeviled by a lack of new blockbuster medicines, and analysts expect the industry's fate will be affected greatly by the Democrats' new congressional majorities.

The change of political power, however, could cut two ways for drugmakers: Democrats are more likely to cast a suspicious eye on steep increases in prescription drug prices, but they are also more likely to make such drugs widely available to those in need.

Another sector in for greater scrutiny is energy. Democratic leaders are putting together legislation that would rescind billions in drilling incentives and raise federal royalty payments on offshore oil production. The oil industry could face sharp criticism and pricing restraints if fourth-quarter results, due out by the end of the month, show profits at the familiar stratospheric levels of recent quarters.

Political tensions around the globe will continue to hover over the markets, influencing investor confidence, particularly about oil prices. "We are an international economy, and problems travel fast coming in and going out," Silverblatt said.