For U.S. stock markets, 2004 was a tug of war between bulls and bears. But by the end of the year, the bulls seemed firmly in control. The Dow Jones industrial average ended the...

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For U.S. stock markets, 2004 was a tug of war between bulls and bears. But by the end of the year, the bulls seemed firmly in control.

The Dow Jones industrial average ended the year at 10,783.01, up just 3.2 percent on the year but a more impressive 7 percent in the fourth quarter. The Standard & Poor’s 500, a broader market gauge than the Dow, finished at 1,211.92, up 9 percent on the year with an 8.7 percent gain in the last quarter.

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As those figures suggest, nearly all of 2004’s gains came at the end of the year. Until about two months ago, the market had oscillated between small losses and even smaller gains; the S&P 500, for example, didn’t stray more than 4.5 percent from where it started the year until November.

Why? The investment community was split almost evenly between bulls and bears. Bulls focused on continued productivity gains, solid corporate profits, robust consumer spending and interest rates that remained at historically low levels. Bears, meanwhile, pointed to soaring oil prices, the weakening U.S. dollar and continued turmoil in Iraq and the rest of the Middle East.

If all that sounds a bit like the presidential campaign, it should. The bitterly contested race — and the prospect that it could be as close as in 2000 — arguably was the biggest cloud hovering over the markets last year.

“There was so much uncertainty — the election was so close — and the market doesn’t like uncertainty,” said Bill Whitlow, portfolio manager at Davidson Investment Advisors in Seattle.

The election resolved much of that uncertainly, and the markets took off. Through Election Day, the S&P was up 1.6 percent; since then, it’s gained 7 percent. The Nasdaq index, down 1 percent through Election Day, is up 9.6 percent since then; it finished 2004 at 2,175.44.

DAVID KARP / BLOOMBERG NEWS

Trading Assistant John Urbanowicz readies for 2005 by donning gag glasses on the floor of the New York Stock Exchange yesterday.

Oil prices, which peaked on Oct. 22 and have fallen about 23 percent since, also cheered investors — many of whom had feared that oil would hit $60 or even $70 a barrel.

“That’s been a real tailwind that’s come back to help the market,” said John Fry, Seattle-based director of investment services for Citigroup Private Bank. “But one could argue that this market is catching up to good fundamentals that were there all along.”

Energy-related stocks tracked the run-up and subsequent decline in oil prices. For the full year, energy was the top-performing industrial sector, gaining 30 percent. In the fourth quarter, however, energy was the weakest sector, with just a 4 percent gain.

Though technology stocks were up just 1.8 percent for the full year, they revived impressively in late 2004. Led by eBay and Yahoo!, technology was the fourth quarter’s top performer among S&P’s 10 industrial sectors, rising 13.5 percent.

“Investors are focusing on where the fastest earnings growth is coming from over the next year or two, and that’s drawing them to infotech, biotech, that sort of thing,” said Art Nunes, chief market strategist at IMS Capital in Bellevue.

Close behind was the consumer-discretionary sector, up 13.4 percent, led by hotels, restaurants and vendors of clothing and luxury goods. Those stocks benefited from continued strong consumer spending, which some analysts had predicted would drop off.

The year’s top performer among Northwest stocks, specialty retailer Coldwater Creek, shared in that trend. Shares in the Sandpoint, Idaho-based company soared 321 percent last year, from $7.33 to $30.87.

Other regional leaders were Zones, the Auburn-based computer vendor (up 290 percent) and Oregon Steel Mills (up 249 percent). The Portland-based company, like other steelmakers, was lofted by soaring steel prices, driven mainly by demand from China.

It wasn’t a good year, however, for the semiconductor industry. Fueled by projections of oversupply and weak pricing, investors pushed down the S&P’s semiconductor index by nearly 22 percent, though it recovered somewhat in the fourth quarter.

Producers of semiconductors and chip-making equipment were prominent among the Northwest’s losers: Micron Technology of Boise, Idaho (down 8.3 percent); Bend, Ore.-based Advanced Power Technology (down 10.4 percent); and TriQuint Semiconductor and Lattice Semiconductor, both of Hillsboro, Ore. (down 37.1 percent and 41.1 percent, respectively).

The Northwest’s biggest loser was Beaverton, Ore.-based Planar Systems, which makes flat-panel displays. Stung by falling demand and growing inventories, Planar stock dropped 53.8 percent last year, finishing at $11.23.

Overall, 2004 was the first year since 2000 that finished with more Northwest companies listed on major exchanges than it began with. Only two companies in the region, Portland-based Fog Cutter Capital and microHelix, were delisted last year (both were delisted from the Nasdaq); five companies were acquired and four moved their head offices out of the region.

Besides nine newly public Northwest companies (see sidebar), two Bulletin Board companies (Bellevue-based SCOLR Pharma and Spokane-based Mines Management) were promoted to the American Stock Exchange, and Tut Systems relocated from California to the Portland suburbs.

Most economists are predicting continued but moderating growth in the U.S. economy this year and gradually rising interest rates and inflation, which — barring what Fry called “unforeseen geopolitical events” — should create a favorable environment for stocks.

But which ones? Nunes said he expects small- and mid-cap stocks to lead the way again, as they did in 2004, but added that investors will increasingly be looking for value stocks — those trading for less than their intrinsic worth.

As interest rates rise, he said, growth companies will have to post ever-higher returns to justify their valuations. That, he said, makes for a very unforgiving environment.

“The growth-stock investors are really going to have to pick their stocks well if they want to make any money,” he said. “There’s no room for error.”

Whitlow agreed that value will become more important, but suggested that, entering the fourth year of the recovery, it might be more easily found in large-cap stocks. “I think small-caps may have gotten a little overextended,” he said.

But Whitlow, who runs a diversified “multi-cap core” strategy for Davidson, said he doesn’t expect any particular sector to dramatically outperform the rest of the market.

“Given that we’re in the middle of the recovery, and we’ve already had the run-up in economically sensitive stocks, we don’t see a lot of reasons to make a big sector bet on anything,” he said. “It’ll be a stock-pickers market.”

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com