Business Environment
After a record-breaking 1999 and a strong start in 2000, global financial markets slowed during the latter part of the year, particularly in equities. Investors tended to avoid the turbulent stock markets in the second half of the year, as technology stocks fell, and the Nasdaq posted its weakest performance since 1971. Initial public offerings ("IPOs"), which reached unprecedented volumes in 1999 due to extremely high customer demand, declined later in 2000 when investors lost confidence in companies without a history of profits. After raising interest rates a total of six times since June of 1999, the Federal Reserve kept rates constant throughout the second half of 2000, and then lowered the federal funds rate by a full point in January of 2001. A weak euro and rising energy prices, combined with a declining Nasdaq, caused dips in most major markets outside the United States, as evidenced by a decline in the Dow Jones World Stock Index, excluding the United States. Although global stock and bond issuance declined 9%, investment banks earned record underwriting fees, due to several large IPOs in the first half of the year.The yield on the 10-year Treasury note fell to 5.11% at the end of 2000 from 6.44% at the end of 1999, and the yield on the 30-year bond dropped to 5.46% from 6.48%, as investors drove up the prices of government securities in an attempt to avoid losses in the stock market. A growing U.S. budget surplus allowed the Treasury to begin to buy back outstanding bonds, further increasing demand for outstanding issues and causing bond prices to rise, despite three interest rate hikes in the first half of 2000. Due to slower growth in corporate earnings and higher rates of default, high-grade corporate and high-yield bonds performed poorly in 2000. Credit spreads widened significantly throughout the year, as the spread between yields on Treasuries and corporate bonds reached its highest point in over ten years. In Europe, inflationary pressures led the European Central Bank to raise short-term rates six times in 2000.
U.S. equity markets which, during 1999, experienced extraordinary gains that were led by an unprecedented demand for communications and technology stocks, delivered disappointing results in 2000, as the devaluation of many of these same stocks caused indices to fall. Prices of telecommunications, media, and technology stocks, collectively known as TMT stocks, which soared in 1999, decreased as a result of concerns over corporate profits. After achieving an all-time high in March of 2000, the Nasdaq declined 39.3% in 2000, erasing almost all of the gains achieved in 1999. In 2000, the Dow Jones Industrial Average and S&P 500 declined 6.2% and 10.1%, respectively, due to widespread market corrections as growth in the U.S. gross domestic product fell to its lowest level in five years.
Global equity indices reflected the weak performance of U.S. equity indices. The Dow Jones World Stock Index, excluding the United States, was down 17.4% from the end of 1999. Rising oil prices and global interest rates, combined with a 6.3% decline in the value of the euro against the U.S. dollar, led to a downturn in global equity markets. Deflation of TMT stocks had the greatest impact in Europe, as well as Taiwan, Korea, and Japan. The decline in these stocks was partly offset by gains in Europe’s financial services, banking, and pharmaceutical sectors. Due to political uncertainty and stalled corporate restructuring in Japan, the Nikkei 225 index fell 27.2% in yen terms and 34.8% in U.S. dollar terms for the year, the sharpest decline since 1990. Emerging markets suffered the most, especially in Asia, where five stock markets declined by 30% or more, amidst rising U.S. interest rates and high oil prices throughout most of the year. Latin American markets also performed poorly, led by Argentina, where there was weak economic growth, high borrowing costs, and a 24.3% stock market decline for the year.
Global underwriting volume, after reaching record levels in the first quarter of 2000, declined significantly by the end of the year. Total global stock and bond issuances were off 9% in 2000 at $3.0 trillion. Equity and equity-linked issues in the United States totaled $282 billion during 2000, surpassing the previous record of $214 billion set in 1999. Domestic IPOs surged to a record $73 billion during the year, a 15% increase from the record 1999 levels, driven by a strong first half of 2000. Widespread concern surrounding credit risk and quality led to a 12% decline in global debt issuances during 2000.
Strategic advisory activities reached record levels in 2000, reflecting a continuation of the high level of merger and acquisition activity experienced during 1999. Companies continued to seek strategic alliances to increase earnings, in particular by combining Old Economy blue chip companies with New Economy, Internet-based companies. Additionally, in the United States, companies rushed to enter into deals before the anticipated elimination of pooling-of-interests accounting treatment. Announced mergers and acquisitions in the United States increased over 16% from 1999 to a record $1.8 trillion, while global deals advanced 6% to $3.5 trillion. After a record-setting 1999, European announced merger and acquisition levels were down 7%, as telecommunications industry deals slowed substantially.
Merrill Lynch continually evaluates its businesses for profitability and performance under varying market conditions and, in light of the evolving conditions in its competitive environment, for alignment with its long-term strategic objectives. Maintaining long-term client relationships, closely monitoring costs and risks, diversifying revenue sources, and expanding strategically all contribute to mitigating the effects of volatility on Merrill Lynch’s business as a whole.
