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Volatile year ends with modest gains

So, how did you do in the stock market last year? Don't worry if you don't have a clear-cut answer; Wall Street's gyrations in 2004 had many investors scratching their heads.

The stock market's ups and downs in 2004 were enough to make you want to stuff your brokerage statements in a drawer, unopened. Well, it's the end of the year, so let's look in that drawer and see how you did.

"I feel like I'm right back where I started from," said Jeremy Rhoades, a sales director in Houston. "Right now, I guess I'm maybe 3 or 4 percent from where I was this time last year."

Like most individual investors, Rhoades' holdings are primarily in mutual funds. And since many investors have money in index funds such as those tied to the Standard & Poor's 500, they're naturally disappointed with returns that were paltry in comparison to 2003, when the S&P 500 gained 26.4 percent and the Nasdaq composite index surged 50 percent.

Why didn't we repeat 2003's performance, especially after the market fell so badly in 2001 and 2002?

Three reasons: jobs, oil and the dollar.

Stocks rose steadily until April, when questions began to arise about economic growth. And job creation figures from the Labor Department, one of the most closely watched barometers of the nation's economic health, began to fall in June. After that, confidence in the economy and stocks began a nosedive, leading to a long summer drought that pushed the major indexes lower.

That "soft patch," as Federal Reserve chairman Alan Greenspan famously called it, extended through the fall as crude oil futures rose steadily, topping out at about $55 per barrel in late October.

And then, just as crude oil futures were falling back below $50, the dollar reached new lows against most major currencies. That led to fresh questions about the U.S. trade deficit and whether foreign central banks would abandon Treasury bonds. That also muted the widely expected year-end rally that was supposed to push your returns back into double digits.

The market's performance for the year is closer to the gains it historically has enjoyed, although they are slim compared with the runaway advance of the late 1990s _ or 2003, for that matter. That might come as some small comfort for the average investor who piles money into mutual funds, 401(k) and 529 college savings plans, but does little trading beyond that.

What about more active investors, the ones who make a hobby _ some say an obsession _ of stock trading? They had the roughest time this past year.

Active retail investors like sector trends, such as the booming tech sector circa 1998. And at the start of 2004, tech seemed to be the place to be again. The Nasdaq, laden with major technology stocks, was up 7.5 percent through Feb. 26.

And then it tanked. By August, the Nasdaq had wiped out a year's worth of gains. Plenty of investors had bailed out, absorbing the losses, but for those who stuck with it, the Nasdaq managed to climb out of the morass and post small gains.

Likewise, there was a lot of buzz about pharmaceutical stocks. But by March, those shares slid along with the overall market. Then, on Sept. 30, Merck & Co. said it was pulling its blockbuster arthritis drug, Vioxx, from the market because of a high incidence of heart attack and stroke among its users. Merck lost a quarter of its value in a single day of trading.

That led to a wave of questions regarding the safety of prescription drugs and the efficacy of the government's review process.

One sector posting major gains was energy. But while oil prices will remain high for the foreseeable future, analysts note that, eventually, the big oil companies will have to make major investments in oil exploration and refining to keep up with global demand. There go the profit margins.

"You can't make sector bets in this market," said Hugh Johnson, chief investment officer at First Albany Corp. "I've heard it called a stock picker's market, but most people have a really tough time picking those individual stocks. Even the professionals get it wrong sometimes."

Yet two stocks turned out to be the closest Wall Street has to a sure thing: Google and Microsoft.

Setting aside the barrage of press coverage surrounding Google Inc.'s August stock offering, one thing is certain: Google made money for people. From its offering price of $85, Google has more than doubled in value. At the time, it seemed like a risk. Now, of course, those individual investors who went through the company's online Dutch auction feel pretty good about it.

"I feel like I was completely justified," said Cyndi Mackell of Philadelphia. "Everyone thought I was taking this big risk, and I do understand there was a risk there. But I believed in the company, and I've made a lot of money off it."

Less risky was Microsoft Corp.'s $3 dividend. The idea was simple: Anybody who owned Microsoft stock as of Nov. 15 would get a $3-per-share dividend. Microsoft hoped the move would encourage people to buy its stock, thus driving up the price.

The announcement encouraged a lot of buying, and the dividend was paid on Dec. 2. The stock closed at $27.09 that day _ meaning that Microsoft gave away $32-billion to its investors for a 9 cent increase in its share price.

It was that kind of year.

The board inside the Nasdaq Marketsite in New York shows Google Inc.'s closing price after its frist day of trading Aug. 19. Shares of Google, owner of the world's most popular Internet search engine, jumped 18 percent on the first day of trading after the company went public.

On Sept. 30, Merck & Co. said it was pulling its blockbuster arthritis drug, Vioxx, from the market because of a high incidence of heart attack and stroke among its users. Merck lost a quarter of its value in a single day of trading.

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