By Martin Wolk Executive business editor
msnbc.com
updated 12/31/2004 4:38:50 PM ET 2004-12-31T21:38:50

After a banner year for stocks in 2003, our readers proved somewhat overoptimistic about 2004. And most readers hopelessly failed to predict the direction of interest rates, based on the results of MSNBC.com’s unscientific annual survey.

Major Market Indices

Based on about 11,000 responses received by late January 2004 , 69 percent of readers expected the Dow Jones industrial average to finish the year above 11,000, which would have required an increase of at least 5 percent in the benchmark index.  In fact the Dow ended the year just shy of that level at 10,783, up just 3.1 percent for the year.

Similarly 64 percent of respondents predicted the tech-dependent Nasdaq index would finish the year at 2200 or above, which would have required an increase of about 10 percent or more. The Nasdaq ended the year's final trading day at 2175.44, up 8.6 percent for the year.

Granted, a few more good days and both indexes would have climbed above those arbitrary benchmarks. (We had to draw the lines somewhere.)

But 24 percent of respondents predicted the Dow would rise past 12,000, which would have required a gain of 15 percent. And 26 percent cheerily predicted the Nasdaq would rise 30 percent or more to surpass the 2600 level, last seen in the glory days of 2000.

To be completely fair to readers, we probably should have included a question on the performance of the Standard & Poor’s 500, which is more broad-based than the Dow or  Nasdaq and better represents the overall performance of the stock market.

The S&P 500 ended the year with a gain of about 9 percent, in line with what the plurality of readers expected for the Dow. The Dow was held back this year by problems affecting a few of its 30 component stocks, including Merck, Pfizer and American International Group.

The “quirky” Dow, despite its wide following, actually is a poor representative of overall stock market behavior, said Larry Wachtel, market analyst for Wachovia Securities. Despite the modest gain in the Dow, this year saw a “stealth bull market” in which advancing stocks have swamped decliners, he said. 

“People made a lot of money this year outside of these indices, especially outside the Dow,” he said.

On interest rates, our readers — like most professional economists — failed to predict the steady increase in short-term interest rates engineered by the Federal Reserve beginning in late June, which brought the benchmark overnight rate to 2.25 percent from 1 percent.

And 79 percent of readers expected that long-term mortgage rates would end the year above 6 percent. Rates breached the 6 percent level for several weeks in the spring, then defied conventional wisdom and fell back to close the year at about 5.8 percent, based on a commonly used benchmark.

A year ago there was "great uncertainty" about the direction of interest rates and the economy," said Rich Yamarone, director of economic research at Argus Research.

Few analysts saw the upward creep of inflation that would spur the Fed to raise short-term rates five times in the second half of the year. And most analysts assumed that long-term interest rates would rise. Instead they are ending the year just about where they began it.

"I think what everyone missed was the flight to safety of the U.S. Treasury market," Yamarone said. "Of all the places in the world to invest, we're still the safest place."

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