NEW YORK (CNN/Money) -
After last year's blowout bash, 2004's modest stock market advance seems, well, anticlimactic.
To many, it feels like the market meandered for most of the year. And frankly, it did, if you look at the major indexes -- the Dow 30, the Nasdaq composite and the S&P 500. But break it down a little more, and it was actually a decent year for stocks.
Well, specifically, energy stocks. Commodities, too. Anything housing related. Apple Computer (Research) was smoking, up 211 percent. And small caps equaled big returns.
As of Friday's close, the Dow Jones industrial average has gained around 2 percent year-to-date, the Standard & Poor's 500 index has gained around 7.5 percent and the Nasdaq composite has gained around 6.5 percent.
Part of the reason for the markets' sluggishness this year is last year's resplendent stock run, the analysts said.
"I think last year was a good year for stocks, I think this year was extremely difficult until recently," said David Briggs, head of equity trading at Federated Investors.
Following the three-year bear market, stocks surged in 2003 in anticipation of a profit recovery, said Barry Ritholtz, a market strategist at Maxim Group. 2004 has mostly been about digesting those gains, he added.
"If you look at which sectors have done particularly well this year, including home builders, mining, energy, other commodities, they have done well because of unusual factors," Ritholtz said, "such as the still historically low interest rates, which are already rising, or demand from China for commodities."
Small caps and energy
The Russell 2000, the leading small cap index, has gained 16.5 percent this year as of Thursday's close, outperforming all of the other big indexes.
"This year has really been a small- and mid-cap market, particularly on the value side," said Grace Fey, executive vice president and portfolio manager at Frontier Capital Management. "I think 2005 will be a shift to larger companies, and more of a growth market from a value market."
"It's been an incredibly selective year," she said. "There was no real leadership, except for energy, but energy makes up only 5 percent of the S&P 500, so that wasn't enough to give a substantial lift to the broader market."
Surging crude oil prices amid higher global demand meant energy was the best performing sector year-to-date in the broad S&P 500 index, the S&P Midcap 400 index and the S&P Smallcap 600 index.
In the broad S&P 500 index, energy rose more than 28 percent, followed by utilities, up more than 18 percent and industrials, up more than 16 percent.
On the Midcap index, energy was No. 1, up nearly 33 percent year to date, followed by materials, up more than 26 percent and consumer staples, up 18.7 percent.
Gains on the Smallcap index were even larger, with energy up nearly 52 percent, followed by materials, up 35 percent, and industrials, up 25 percent.
The best and the worst
The Fed funds rate started climbing in 2004, to 2.25 percent from 1 percent, and so called "real" interest rates rose as well, including credit card interest and refinancing rates. But with rates still near historic lows, the housing and refinancing boom continued.
"We very much benefited this year from the still-low interest rates, with the Home Depot's and Lowe's of the world doing well," Maxim Group's Ritholtz said. "The whole universe of homebuilders and mortgagers did really well, too, but as interest rates continue to rise next year, that's going to dry up some."
Industrial stocks such as General Electric and Tyco did well, benefiting from an expanding global economy and from the weak dollar, which also benefited a number of other multi-nationals.
Healthcare was the biggest loser, sector wise, in 2004, particularly big pharma. The sector suffered before the election on concerns that a Kerry win would bring in a period of lower costs for consumers and higher expenses for drugmakers, and the allowance of drug reimportation from Canada and other nations.
"But even without that, Merck had its Vioxx disaster, and other companies had specific problems," said Frontier Capital Management's Fey.
Semiconductors had a tough year, too, with the Philadelphia Semiconductor index down more than 15 percent year-to-date, and Intel the second worst performer on the Dow, down nearly 29 percent year-to-date.
A peek at '05
Fey thinks health care stocks will start doing better in 2005, particularly the medical device makers. Multinationals should also continue doing well in the first part of the year, benefiting from the still weak U.S. dollar.
She also thinks financial services companies will do well, because interest rates will likely continue to rise at a measured pace, as the Fed has indicated.
"Looking ahead to 2005, we are moderately optimistic and are looking for a stronger performance in the first half of the year followed by some weakness in the second half of the year," wrote Michael Sheldon, chief market strategist at Spencer Clarke in a recent note.