By Martin Wolk Executive business editor
msnbc.com
updated 12/30/2005 6:10:14 PM ET 2005-12-30T23:10:14

Wall Street wrapped up a disappointing year Friday with a rally-killing selloff, sending the stock market to its lowest levels since before Thanksgiving and dunking the Dow Jones industrial average into negative territory for the year.

Major Market Indices

Up until the final session of the year, it appeared as though the benchmark Dow, the market's best-known indicator, would end 2005 with a modest gain. But as the markets final trading hours faded away, the few traders still doing business struggled with the same issue they have faced all year: finding a reason to buy stocks.

In the end, the Dow shed about 67 points or 0.6 percent to end the year at 10,717.50, a loss of 0.6 percent for the year. The downturn ended a brief two-year winning streak for the Dow.

The S&P 500, which represents a broader cross-section of the big companies, ended the year with a modest gain of 3 percent, while the Nasdaq composite index, which mirrors the fate of technology companies, managed a gain of 1.4 percent for the year.

The broad stock market was in positive territory most of the year, but gains were limited as investors worried about the impact of a steady series of interest rate hikes engineered by Federal Reserve policy-makers concerned about the potential for inflation. The summer hurricanes that knocked out energy production and sent fuel prices soaring added to the worries about inflation and raised the prospect of a broader economic slowdown.

The broad market actually hit its high-water mark for the year in mid-December when the Fed began signaling that it is preparing to end the rate-hike campaign that began in June 2004. But analysts generally expect at least two more increases, including one after Fed Chairman Alan Greenspan steps down Jan. 31. He is expected to be succeeded by Ben Bernanke, a former Fed governor and Princeton University economist.

“It’s really the Fed at this point that’s kept the market in check,” said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers. “The historic conversation between the Fed and the markets has become a bit of an argument over whether there’s really inflation, and whether we need those rate hikes.”

At the end of 2004, with the uncertainty of the presidential election over and the expanding economy at last beginning to add jobs, most forecasters expected the financial markets to enjoy another decent year, along the lines of the 9 percent gain posted by the S&P 500 in 2004.

Instead the markets were uninspiring for most of the year, even as the economy and corporate profits outperformed expectations. The 30-stock Dow was weighed down further by problem children like General Motors, which lost 52 percent for the year, and Pfizer, which shed 13 percent.

Bonds moved lower in volatile trading Friday, with the yield on the 10-year Treasury note rising to 4.39 percent from 4.36 percent late Thursday. The inversion of the yield curve this week — with two-year bonds now yielding more than the 10-year — pressured stocks, as many on Wall Street feel that such an inversion augurs a slower economy and a possible recession.

Energy prices built on the previous session’s gains, with a barrel of light crude ending the year at $61.04, up 72 cents for the day and a solid 40 percent for the year.

High energy prices and their impact, real and potential, on consumer spending, inflation and corporate profits kept Wall Street on edge for much of the year, although investors’ attitudes remained bullish. Wall Street bought heavily into each rally this year, but while the Dow flirted with the psychologically important 11,000 in both March and November, caution ultimately prevailed each time and investors cut those rallies short in order to preserve profits.

The Associated Press contributed to this report.

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