2005 was the kind of year that gives index investors fits but makes stock-pickers smile. The major indexes were flat or up only slightly...

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2005 was the kind of year that gives index investors fits but makes stock-pickers smile.

The major indexes were flat or up only slightly; what movement they showed came in the last two months of the year. But dig beneath those broad trends, and you’ll find plenty of individual industries and companies that soared or sank.

For most of the year, market watchers said, positive economic fundamentals, such as resilient consumer spending and generally strong corporate profits, were overshadowed by worries over soaring energy prices, the bubbly housing market and the Federal Reserve’s continued campaign of interest-rate increases.

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“There was no real breakthrough to the positive side,” said David Darst, chief investment strategist for Morgan Stanley’s individual investor group. “Each one of these little nicks has been chipping away at investor confidence.”

Overall, the 30-stock Dow Jones industrial average was down 0.61 percent for the year, after a 1.4 percent gain in the fourth quarter that ended Friday. The Dow finished 2005 at 10,717.50.

The broader S&P 500 index managed a 3 percent gain, closing at 1,248.29. The technology-heavy Nasdaq composite gained just 1.4 percent, ending the year at 2,205.32.

Those underwhelming results were mirrored by The Seattle Times index of Northwest-based companies, which finished 2005 at 1,474.84, up 3.4 percent.

Even those modest gains overstate how much movement there was in the broad market. As recently as Nov. 2, for example, the S&P 500 was almost exactly where it was at the beginning of 2005, and had oscillated in a fairly narrow band all year. The S&P finally broke out of that range last month, gaining 3.5 percent in a month.

A similar pattern was seen in 2004, when a flat market suddenly took off in late October. Falling oil prices were a key driver both years. But unlike last year, when the late-year rally was long and strong enough to give the S&P a 9 percent gain for the full year, 2005’s minirally stalled out this month when oil prices stabilized and then began rising again.

“We didn’t get the Christmas present of a drop in the oil price,” Morgan Stanley’s Darst said.

Besides oil, the other big macro factor shaping 2005’s markets was the Fed’s interest-rate policy. Despite eight increases in the target federal funds rate during the year — raising it from 2.25 percent to 4.25 percent — long-term rates, which have a more direct influence on things like inflation expectations and home mortgages, ended 2005 only slightly higher than where they started.

“The fact that long-term rates didn’t rise in some sense offset some of the impacts of the higher costs of energy,” said David Joy, chief market strategist of RiverSource Investments in Minneapolis. “They fought to a draw, and as a result the markets weren’t affected by either interest rates or energy.”

Investors seeking more rewarding, or at least more interesting, places to park their money had a lot of choices. It’s likely 2005 will go down as the year when hedge funds either became mass investment vehicles or started a major shakeout; real estate and precious metals also competed for investors’ cash.

Going global was another promising alternative. Japan’s Nikkei 225 index, for example, gained nearly 40 percent, its strongest annual performance since 1986; the S&P Europe 350 index was up 22.8 percent.

Nonetheless, some U.S. issues rode 2005’s trends to market-beating gains. Chief among them, unsurprisingly, were oil- and energy-related stocks.

The leader among S&P’s 63 market sectors was energy equipment and services, up a whopping 50 percent on the year; oil and gas producers came in fifth, a still-impressive 27.5 percent. Utilities, which could pass along higher fuel prices to customers, also performed well above the market averages.

The nation’s building boom benefited construction and engineering companies, up 32.8 percent, and vendors of construction materials, up 26.3 percent.

Thrifts and mortgage companies, however, were among the year’s losers: down 11.4 percent, on the Fed’s continued tightening and fears that the housing boom eventually would go flat. Seattle-based Washington Mutual, the nation’s largest thrift and a big player in the mortgage business, was an exception: It finished the year at $43.50, up 2.9 percent.

The biggest Northwest winners were among the smaller stocks. PW Eagle, a Eugene, Ore.-based maker of plastic pipe, was a big beneficiary of the construction boom: It quintupled its share price, closing 2005 at $20.50, and declared its first-ever dividend earlier this month.

The boom also helped Flow International in Kent, a maker of water-jet cutting tools. Flow finished the year at $8.42, more than double its price a year ago. Many small technology stocks struggled, none more than Seattle-based Loudeye, which lost 81.5 percent of its market value.

With the markets not exactly setting the world on fire, investor appetite for initial public offerings (IPOs) also dropped off.

Overall, 218 companies sold shares onto major U.S. markets for the first time last year, down from 250 in 2004.

Just three Northwest companies successfully completed IPOs: Seattle-based marine insurer SeaBright Insurance; teen-centric retailer Zumiez, headquartered in Everett; and MWI Veterinary Supply of Meridian, Idaho.

With a 140 percent gain since its May debut, Zumiez was not only the best-performing local IPO but one of the top performers nationwide.

Bellevue-based online travel agency Expedia re-entered the ranks of Northwest stocks in July, completing its spinoff from IAC. And Quinton Cardiology merged with California-based Cardiac Science in September; the resulting company had Cardiac Science’s name but Quinton’s Bothell headquarters.

With many economists expecting significant changes next year in the macroeconomy — less housing “froth,” more restrained consumer spending (offset somewhat by increased corporate capital spending), an end, or at least a pause, in the Fed’s rate-tightening cycle — investment professionals say 2005’s winners aren’t likely to repeat.

Art Nunes, market strategist at IMS Capital Management in Bellevue, said he wouldn’t be surprised if energy and utility stocks end up at the bottom of next year’s pile — especially if, as he predicts, oil prices fall into the $40s.

Current prices, Nunes said, are “not based on supply and demand for the commodity itself, and once the speculation cools down, I think the price will come back down to where supply and demand say it should be.”

Steve Rhone, chief executive of Wentworth, Hauser & Violich, said technology companies, up a measly 1 percent as a group this year, should gain from the expected upturn in capital investment.

The wave of mergers and acquisitions that was much in evidence this year will continue in 2006, Rhone said — benefiting both pharmaceutical stocks, where he expects much of the consolidation to occur, and the investment banks that put deals together.

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