updated 1/3/2006 7:57:10 AM ET 2006-01-03T12:57:10

Investors marked the last trading day of 2005 Friday with the same conundrum they faced all year — trying to find a good reason to buy stocks. Wall Street fell to its December lows, and the Dow Jones industrial average finished the year with a loss.

Major Market Indices

With little news to spur buying, stocks fell as investors consolidated their meager profits on the year. As a result, the Dow suffered its first down year since 2002, although the other major indexes posted modest gains for 2005.

This year was marked by skyrocketing energy prices, a slowing economy, hot-and-cold inflation threats and the Federal Reserve steadily raising interest rates — all of which made investors nervous over the state of the economy and kept stocks volatile but ultimately little changed since the end of 2004.

Looking ahead, investors hope the Fed will stop raising rates as early as possible in 2006 to avoid slowing the economy unnecessarily, and nervousness on this point has kept stocks in check through December.

“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.”

The Dow fell 67.32 points, or 0.62 percent, to 10,717.50. It needed to remain above 10,783.01 for a positive 2005. The broader Standard & Poor’s 500 index fell 6.13 points, or 0.49 percent, to end the year at 1,248.29, while the Nasdaq composite index gave up 12.84 points, or 0.58 percent, to close at 2,205.32.

Bonds moved lower in volatile trading, 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 settling at $61.04, up 72 cents on the New York Mercantile Exchange. Crude futures rose 40 percent in 2005.

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.

For the year, the Dow fell 0.61 percent, while the S&P rose 3 percent and the Nasdaq gained 1.37 percent.

Much of those gains came in the fourth quarter, when November’s rally, prompted by lower energy costs and the appearance of an end in sight to the Fed’s interest rate hikes, caused eager investors to jump back into stocks. For the quarter, the Dow rose 1.41 percent, the S&P climbed 1.59 percent and the Nasdaq gained 2.5 percent.

Yet December was a difficult month for stocks and the much-anticipated “Santa Claus” rally never really materialized as concerns once again arose over the Fed’s policies and energy prices marched back above $60 per barrel. For the month, the Dow lost 0.82 percent, the S&P shed 0.1 percent and the Nasdaq fell 1.23 percent.

On the final day of trading, there was little corporate news to give stocks a lift. Dow component Citigroup fell 5 cents to $48.53 after media reports said the financial services company was leading a consortium to buy a stake in China’s Guangdong bank for $3 billion . Citigroup was also approved to trade the yuan as an interbank foreign exchange market maker

Google Inc. is the defendant in a $5 billion lawsuit brought by Rates Technology Inc. Rates claims Google inappropriately used its voice-over-Internet technology in its Google Talk product, introduced earlier this year. Google, which said the suit is without merit, fell $5.29 to $414.86.

Chipmaker Intel Corp. fell 11 cents to $24.96 as it plans to unveil a new branding strategy that includes a new logo, a change in its “Intel Inside” stickers on personal computers, and dropping the long-standing Pentium brand name.

Overseas, Japan’s Nikkei average fell 1.42 percent, though the index remained up 40 percent for the year on a strong second-half rally. In Europe, Britain’s FTSE 100 was down 0.35 percent, Germany’s DAX index dropped 0.92 percent, and France’s CAC-40 fell 1.21 percent. All three European indexes posted double-digit gains for 2005.

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