Flat Finish to a Sparkling Year

The major indices post their best annual gains in years after a three-year slump.
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Updated from 4:06 p.m. EST

The

Dow

and

S&P 500

managed small gains and finished a stellar 2003 at their zenith, following a very positive weekly unemployment report.

The Dow advanced 28.88 points, or 0.3%, to 10,453.92, a 21-month closing high; the S&P 500 improved 2.28 points, or 0.2%, to 1111.91, a 20-month closing high; and the

Nasdaq Composite

lost 6.51 points, or 0.3%, to 2003.37, just shy of its 23-month closing high set Tuesday.

Volume was light on the

New York Stock Exchange

, as only 986 million shares traded, while 1.75 billion shares changed hands on the

Nasdaq

. Decliners beat advancers by about 5 to 4 on the Nasdaq and were close to even on the NYSE.

Stocks finished the year higher for the first time since 1999. The Dow gained 25%, its best finish since 1996; the S&P 500 rose 26%; and the Nasdaq surged 50%.

"Today's good initial unemployment claims number confirms the strengthening trend in the economy," said Ken Tower, chief market strategist at CyberTrader.

In economic news, initial jobless claims for the week ended Dec. 27 fell by 15,000 to 339,000, the lowest level in almost three years. Economists had expected a much smaller improvement. Claims and their four-week moving average, which reduces volatility, have now spent about three months under the key 400,000 level thought necessary for labor-market improvement.

Other Markets

London's FTSE 100 rose 0.2% to 4,477, while Germany's Xetra DAX, Japan's Nikkei and Hong Kong's Hang Seng were all closed ahead of the New Year's holiday.

The 10-year Treasury bond finished up 3/32 at 4.26%, and is poised to finish the year down for the first time in four years. The 10-year began the year at 3.82% and dipped as low as 3.11% in June before the economic recovery became evident. Bond yields move inversely to prices.

The euro's ascent against the dollar continued, with the European currency at $1.258, up from $1.2551 Tuesday. Meanwhile, one dollar fetched 107.32 Japanese yen, up slightly from 106.97 Tuesday. The dollar fell by about 17% against the euro this year and posted its worst performance against the yen in five years.

Dollar Dread?

Most strategists agree that the dollar's decline will not cause much concern among domestic investors and policymakers, as long as the pace remains orderly. In addition, many predict European officials will act to slow the euro's steep ascent in the coming year, as the

Bank of Japan

has done with the yen. Yet, there is some disagreement about whether the greenback's dip will give foreign investors the jitters.

"U.S. policymakers are not likely to be concerned, as long as the pace is gradual and doesn't represent a sudden loss of confidence in the U.S.," said Sean Callow, currency strategist at IDEAglobal. "It is not worrisome for domestic investors at this stage, because there has been no panic and it has not threatened inflation."

Both Callow and Marc Chandler, chief currency strategist at HSBC, agree that European officials are already nervous about the exchange rate imbalance and expect official statements to that effect early in the year. Throughout the year, the BoJ has worked to slow the yen's appreciation with direct intervention in the currency markets as part of its efforts to keep the Japanese economy afloat.

"There is already some concern in Europe over the pace of the euro's rise," said Chandler. "I would expect Japanese and European officials to issue a statement following the next G7 meeting in February that is likely to try and temper the dollar's decline."

But Chandler and Callow disagree on the effect the greenback's drop is having on foreign investors.

"Show me a falling currency and I will show you a rising stock market," said Chandler. He argues that the falling dollar is great for American companies doing business abroad, is likely to increase merger and acquisition activity, and will have investors favoring equities over bonds.

Callow is skeptical. "Foreign investors are already pretty wary of U.S. stocks. Treasury data show foreign investors have been very cautious in adding to U.S. equity holdings in 2003." He expects one euro to hit $1.30 in the next six months.

Movers

Several popular technology names were moving Wednesday after the awarding of a $400 million government contract for optical and data networking.

Sycamore

(SCMR)

gained 57 cents, or 12.4%, to $5.22 after being tapped to provide digital routers, while

Ciena

(CIEN) - Get Report

improved 46 cents, or 7.5%, to $6.56 after being chosen to do optical transport.

Sprint

(FON)

,

Juniper

(JNPR) - Get Report

,

Qwest

(Q)

and

Cisco

(CSCO) - Get Report

also will play roles in the project.

A.G. Edwards reiterated its buy rating on

Boston Scientific

(BSX) - Get Report

, and raised its 52-week price target for the stock to $42 from $37. The brokerage says near-term volatility aside, the company will have enough funds to explore new growth opportunities. The company's shares gained 22 cents, or 0.6%, to $36.76.

Merck

(MRK) - Get Report

submitted a new drug application to the Food and Drug Administration for Arcoxia, an arthritis drug that is already available in parts of Europe, Asia and Latin America. The shares improved 70 cents, or 1.5%, to $46.20.

CIT Group

(CIT) - Get Report

announced that it had acquired the U.S. factoring assets and liabilities of the U.K. bank

HSBC

for an undisclosed amount. The shares rose 68 cents, or 1.9%, to $35.95.

Looking ahead, the financial markets are closed tomorrow for New Year's Day. On Friday, there are no major earnings or economic releases scheduled.