The upward movement in stock prices that began in 2003 continued throughout 2005. It was a good but not great year for US stocks. The S&P 500 advanced by 4.9%. This increase surpassed the return from cash and US bonds yet was below the annual average return of almost 11% for the past twenty-five years. While stocks in the US moved to positive territory, the foreign stock markets again performed much better as investors moved more money overseas. The bond market, as measured by the Lehman Intermediate Index, was up slightly for the year despite the continued consensus view that long-term interest rates would rise and bond prices would fall.

The real hero of 2005 was the economy. It stayed strong in the face of additional short-term interest rate increases, high oil prices and one of the most devastating natural disasters in US history. As the economy moved ahead, so did corporate earnings. S&P 500 earnings for all of 2005 are expected to have advanced by 13%; this is an above average level of growth and they have increased at a double-digit rate for the past 10 quarters. Much of the increase in earnings came from the energy sector but the results are expected to be strong across the board.

Market Performance Summary