1. Investment & Securities Industry Overview
2004 found investment markets rebounding. Stock markets
were back, regaining ground from spectacular losses in 2000-2002.
Interest rates remained quite low, although up from a low
point which occurred in June 2003. Investment bankers and
stock brokerages seem to have put the stock market crash,
stock analyst woes and accountability problems of 2000-2002
behind them. Layoffs are generally over; hiring has begun
again. Even tech stocks and online trading have regained ground,
well off their low points, while the IPOs are finding significant
success.
Venture capitalists are starting to open their wallets again,
but at much lower levels than during the boom of the l995-2000.
U.S. venture capital funds raised about $18 billion in new
money during 2004, up significantly over 2003.
Corporate merger and acquisition (M&A) activity is running
at a high rate in the U.S. and abroad. Total, global M&A
deals during 2004 were about $1.8 trillion, up from about
$1.3 trillion the previous year. Low interest rates are contributing
to this trend, since they make it less painful to issue new
debt associated with an acquisition. Meanwhile, private equity
funds have been extremely active in M&A activity.
Battered by falling values in their stock portfolios, mutual
fund investments and 401(k)s, during the early 2000s individual
investors have lowered their expectations of future returns
on their investments. Many have turned to real estate for
a large portion of their portfolios, snapping up rental houses,
bigger primary residences and second homes, driving up home
values in the process. Others have steadfastly continued to
pump money into their retirement accounts.
Corporate profits were up significantly in the 2003-2004 period
Banks and most other lenders appear to have learned hard lessons
in recent years and generally are earning good profits.
The investment sector has clearly returned to health. The
presidential election of 2004 is no longer a looming question
mark. However, several threats remain in the background, including
worries about potential inflation, terrorism or political
upheaval as well as persistently high U.S. federal deficits,
high levels of consumer debt and a very low value to the U.S.
dollar.
Wall Street's image was only briefly tarnished by investor
lawsuits and analyst scandals after the stock market crash
of 2000-2001. A more recent scandal in the mutual funds industry
seems to have had little effect on the appetites of investors
for well-managed funds. The stock market is still where most
investors focus their portfolios, and Wall Street holds the
key to the markets. The biggest challenge in the investment
sector will be avoiding another bubble/crash scenario.
A low interest rate environment continued to favor the bond
market during 2004. About $140 billion in new U.S. junk bonds
(bonds with BB+ ratings or below) were issued during the year.
Higher-grade corporate bond activity has been very high as
well, along with collateralized debt instruments such as mortgage
obligation bonds.
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