Wall Street will probably not do too badly in 1999, barring any unforeseen economic, political, or technological disaster. Consider the recent travails of market leader Merrill Lynch & Co. The firm laid off 5% of its workforce at the end of 1998. It expects the stock market to turn down in 1999's first half and forecasts only 1.25% global economic growth this year. Yet Merrill and other industry leaders are still optimistic about the industry and their own firms. Says Chief Executive David H. Komansky: "I think 1999 will be better than 1998. Low rates will generate an environment that we can operate in."

Komansky is betting that the benefits of low and possibly declining interest rates will offset the biggest negative facing the industry: a continuing slowdown in corporate profits, which could depress the stock market. Declining interest rates provide the best possible environment for Wall Street, because lower rates buoy the stock market and encourage issuers of debt.

There is no question that 1998 was a humbling year for the industry. Global fiascos, from Russia's debt default to Long-Term Capital Management LP's near collapse, generated losses and produced terrifying market volatility. As a result, the industry earned an estimated $8.5 billion in pretax income in 1998, down from a record $12 billion in 1997. And risk-conscious investors stampeded out of brokerage stocks. Through mid-December, 1998, an index of brokerage-stock prices weighted by market cap were up only 1.5%, says research firm Financial Service Analytics. That was after soaring 85% in 1997.

BIG BUG. The wild card this year that could seriously hurt earnings is the disruption from potential computer crashes caused by computers not programmed to recognize the year 2000. Morgan Stanley Dean Witter is concerned that a number of its global customers will be unable to upgrade their systems in time. That could force Morgan Stanley to stop doing business with them. Charles Schwab Corp. Co-Chief Executive David S. Pottruck is worried about everything from power interruptions to the ripple effect of an unprepared Internal Revenue Service. "It's a big, serious question out there," he says.

Providing solace is the outlook for mergers-and-acquisitions volume, which set a new record at more than $1 trillion in 1998, says Securities Data Co. And U.S. securities firms think they're poised to benefit from the advent of the euro in 1999. In Japan, U.S. firms expect to benefit from financial-services reform and as savvy buyers of troubled financial assets. Japan's market deregulation will also give U.S. firms better access to that market. In the U.S., legislators could finally approve a financial-services reform bill, which would let securities firms acquire banks. Add it all up, and this formerly high-flying industry has a shot at a fair-to-middling year.

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