2004: The Year in Review
Buy-and-hold equity investors had plenty to smile about in 2004. Total return for the S&P 500 Index was 10.87%, while most other asset classes posted even stronger results. US large-cap growth stocks were once again the weakest relative performers among major asset classes.
Here are the one-year total returns through December 31, 2004:
S&P 500 Index.............................. 10.87%
Russell 1000 Growth Index.................. 6.30%
Russell 1000 Value Index................... 16.49%
Russell 2000 Index......................... 18.32%
Russell 2000 Value Index................... 22.45%
Wilshire REIT Index........................ 33.17%
MSCI EAFE Index............................ 20.25%
MSCI EAFE Growth Index..................... 16.11%
MSCI EAFE Value Index...................... 24.31%
MSCI EAFE Small Cap Index.................. 30.80%
MSCI Emerging Markets Free Index........... 25.56%
Returns on international stocks for dollar-based investors were generally enhanced by local currency appreciation relative to the US dollar in both developed and emerging stock markets.
The positive returns, however, were generally compressed into the final four months of the year. The S&P 500, NASDAQ Composite, and Russell 2000 Indices all reached their lows for the year on August 12 amid considerable pessimism regarding the outlook for stocks. At that time, year-to-date results were negative for all three benchmarks.
Almost every year brings its share of surprises, and 2004 was no exception.
* Small company stocks surprised many observers by outperforming large cap stocks by a significant margin. After outperforming large cap stocks every year for the previous five years, many observers believed large cap stocks would win the relative performance race.
* REIT securities in the US also surprised many observers by bouncing back from the worst one-month loss since October 1987, and then going on to outperform the broad stock market by a large margin, the fifth consecutive year of superior performance.
* Perhaps the biggest surprise was the behavior of interest rates. Fifty-two out of fifty-four economists surveyed by The Wall Street Journal in early 2004 expected yields on ten-year US Treasury notes to rise from their year-end 2003 level of 4.25%. News events throughout the year appeared to support this prediction. Sales of new homes, autos, and consumer goods remained healthy, the Federal Reserve raised the target rate for federal funds five times, and prices for oil and key industrial commodity prices rose sharply. In addition, the federal budget deficit swelled to a record high and the US dollar exchange rate fell relative to most major currencies. In such an environment, most investment professionals were confident that interest rates could only go up. They didn't. Although short-term rates rose, yields on ten-year Treasury notes ended the year at 4.22%, slightly below where they began.
Many investors place great emphasis on assessing the outlook for business conditions when developing their investment strategy. And it should be pointed out that the observations mentioned above are not meant to suggest that all forecasts are inaccurate or that ignoring troublesome news events will always represent a profitable investment strategy. But it illustrates why earning capital market rates of return that are there for the taking often proves so difficult for many investors.
* * * * *
Here are the one-year total returns through December 31, 2004:
S&P 500 Index.............................. 10.87%
Russell 1000 Growth Index.................. 6.30%
Russell 1000 Value Index................... 16.49%
Russell 2000 Index......................... 18.32%
Russell 2000 Value Index................... 22.45%
Wilshire REIT Index........................ 33.17%
MSCI EAFE Index............................ 20.25%
MSCI EAFE Growth Index..................... 16.11%
MSCI EAFE Value Index...................... 24.31%
MSCI EAFE Small Cap Index.................. 30.80%
MSCI Emerging Markets Free Index........... 25.56%
Returns on international stocks for dollar-based investors were generally enhanced by local currency appreciation relative to the US dollar in both developed and emerging stock markets.
The positive returns, however, were generally compressed into the final four months of the year. The S&P 500, NASDAQ Composite, and Russell 2000 Indices all reached their lows for the year on August 12 amid considerable pessimism regarding the outlook for stocks. At that time, year-to-date results were negative for all three benchmarks.
Almost every year brings its share of surprises, and 2004 was no exception.
* Small company stocks surprised many observers by outperforming large cap stocks by a significant margin. After outperforming large cap stocks every year for the previous five years, many observers believed large cap stocks would win the relative performance race.
* REIT securities in the US also surprised many observers by bouncing back from the worst one-month loss since October 1987, and then going on to outperform the broad stock market by a large margin, the fifth consecutive year of superior performance.
* Perhaps the biggest surprise was the behavior of interest rates. Fifty-two out of fifty-four economists surveyed by The Wall Street Journal in early 2004 expected yields on ten-year US Treasury notes to rise from their year-end 2003 level of 4.25%. News events throughout the year appeared to support this prediction. Sales of new homes, autos, and consumer goods remained healthy, the Federal Reserve raised the target rate for federal funds five times, and prices for oil and key industrial commodity prices rose sharply. In addition, the federal budget deficit swelled to a record high and the US dollar exchange rate fell relative to most major currencies. In such an environment, most investment professionals were confident that interest rates could only go up. They didn't. Although short-term rates rose, yields on ten-year Treasury notes ended the year at 4.22%, slightly below where they began.
Many investors place great emphasis on assessing the outlook for business conditions when developing their investment strategy. And it should be pointed out that the observations mentioned above are not meant to suggest that all forecasts are inaccurate or that ignoring troublesome news events will always represent a profitable investment strategy. But it illustrates why earning capital market rates of return that are there for the taking often proves so difficult for many investors.
* * * * *
posted by Bob Moser at
4:06 PM
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