Goldman Sachs 2004 Annual Report Download - page 35

GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 3 3
management’s฀discussion฀and฀analysis
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 3 3
Our operating results in 2004 reflected improvement in the
economic environment as well as a number of trends that have
emerged in recent years. We continued to see increased trading
and investing opportunities for our clients and ourselves in
2004 and, consequently, we increased our market risk during the
year to capitalize on these opportunities. Our Investment Banking
results reflected our best performance in three years as corporate
activity began to recover, although competitive pressures
remained. In our Equities business, although our results were
higher compared with 2003 as customer-driven activity improved,
commission rates continued to decline and demands for us to
commit capital remained significant. In the regulatory environ-
ment, financial services firms continued to be under intense scru-
tiny, with the scope of such scrutiny unabated in the last year.
Consequently, the volume and amount of claims against financial
institutions and other related costs remained significant in 2004.
Given the range of litigation and investigations presently under
way, our litigation expenses can be expected to remain high.
Though our operating results were strong in 2004, our business,
by its nature, does not produce predictable earnings. Our results
in any given period can be materially affected by conditions in
global financial markets and economic conditions generally. For
a further discussion of these trends and other factors affecting
our businesses, see “— Certain Factors That May Affect Our
Business” included below as well as “Business — Certain Factors
That May Affect Our Business” in Part I, Item 1 of the Annual
Report on Form 10-K.
Business Environment
As an investment banking, securities and investment manage-
ment firm, our businesses are materially affected by conditions
in the financial markets and economic conditions generally,
both in the United States and elsewhere around the world. A
favorable business environment is generally characterized by
low inflation, low and declining interest rates, and strong equity
markets. Over the business cycle, these factors provide a posi-
tive climate for our investment banking activities, for many of
our trading businesses and for wealth creation, which contrib-
utes to growth in our asset management business. Although
geopolitical uncertainty continued and inflation was slightly
higher, interest rates, although rising, remained low, merger
activity improved, and global equity prices, although spending
much of the year in a fairly narrow range, generally increased.
For a further discussion of how market conditions can affect
our businesses, see “— Certain Factors That May Affect Our
Business” included below as well as “Business — Certain Factors
That May Affect Our Business” in Part I, Item 1 of the Annual
Report on Form 10-K. A further discussion of the business
environment in 2004 is set forth below.
globa l ฀–฀After improving during the second half of 2003,
growth in the global economy continued to improve during
2004, with worldwide real gross domestic product in the calen-
dar year growing at one of its highest rates in the last twenty
years. The pace of growth was particularly strong in the first
half of 2004, but slowed throughout the remainder of the year.
The Japanese economy grew very strongly early in 2004 but
slowed significantly after the first quarter. After rising early in
our fiscal year, global equity markets spent much of the year in
a fairly narrow range, but many of the major markets rallied
beginning in late October, leading to solid gains over the year.
Although the U.S. Federal Reserve began to raise its federal
funds rate target in June 2004, fixed income markets generally
performed well, as long-term bond yields ended the year close
to, or below the levels at the beginning of the year, and corpo-
rate credit spreads remained tight. In the currency markets, the
U.S. dollar weakened further against the major currencies,
though the weakening was generally smaller than in 2003 and
occurred largely at the end of our fiscal year. Corporate activity,
as measured by industry-wide completed and announced merg-
ers and acquisitions as well as equity underwriting volumes,
increased significantly during the year, reflecting the continued
economic recovery and strengthening equity markets. In addi-
tion, industry-wide debt origination volumes remained strong.
united฀ stat e s ฀–฀The U.S. economy grew at a strong pace
during the year. Real gross domestic product in the 2004 calen-
dar year rose by approximately 4.4%. Although quarterly
growth fell from the very high level seen in the third quarter of
2003, it remained strong throughout the year. A brief softening
in consumer spending led to a decline in quarterly real gross
domestic product growth during the second calendar quarter,
but the pace of economic growth appears to have accelerated
again in subsequent quarters. Strong economic and productiv-
ity growth contributed to strong corporate profit growth
during the year. Inflation increased throughout the year. In
response to the improving environment and rising inflation, the
U.S. Federal Reserve raised the federal funds rate target by 25
basis points in June, and subsequently raised rates a further 75
basis points by the end of our fiscal year to 2.0%. Despite rising
short-term interest rates, long-term yields moved higher only
briefly, for several months around midyear, and ended the year
close to levels at the beginning of the year. With the U.S. dollar
weakening further, financial conditions remained supportive
of economic activity. The Dow Jones Industrial Average, the
S&P 500 Index and the Nasdaq Composite Index increased
8%, 12% and 7%, respectively, during our fiscal year.
europ e ฀–฀Economic conditions improved in Europe during
2004. Real gross domestic product growth in the Eurozone
economies rose to approximately 1.8% in the 2004 calendar
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