Second Quarter 2003 Market Update

1. Second Quarter 2003 Market Update

2. Discussion Topics • Economic Backdrop • Equity Markets • Fixed Income/High Yield • Conclusions

3. Major Factors Affecting the U.S. Market Q2 2003 Another Fed interest rate cut Tax cut legislation approved Positive Negative Monetary policy Economic activity Fiscal policy Corporate earnings Geopolitics Weak employment numbers and generally tepid data Q1 results better than expected Iraq war ends more quickly than expected Neutral Energy prices Inflation Still low, but Fed cites risk of deflation Oil and natural gas prices still high, despite end to war in Iraq

4. Employment Still Weak Unemployment rate rises to 6.1% -- highest in nine years Source: Haver Analytics as of 5/31/03

5. Decelerating Inflation Leads to Deflation Worries As producers face flattening prices, concerns arise about potential sustained deflation Source: Haver Analytics as of 5/31/03

6. Oil and Natural Gas Prices Still High Above average oil and gas prices raise costs for businesses and households Source: Haver Analytics as of 6/30/03

7. Mortgage Refinancing Activity Hits Historic Highs As mortgage rates hit all-time lows, consumers use refi to pay down debt and maintain spending Source: Bloomberg as of 6/27/03

8. Domestic Equity

9. Performance of Domestic Equities Strong, broad-based market gains led by small caps Highest quarterly returns since 1998 Source: FMRCo as of 6/30/03

10. Stock Market Performance (YTD as of 6/30/03) Up 22% from March 11th low Source: FactSet as of 6/30/03

11. All styles and caps post large gains Style and Cap Performance Several boxes now in positive territory over past year 2Q03One Year Note: The above styles are represented by: LV – Russell 1000 Value, LB – Russell 1000, LG – Russell 1000 Growth, MV – Russell Mid Cap Value, MB – Russell Mid Cap, MG – Russell MC Growth, SV – Russell 2000 Value, SB – Russell 2000, SG – Russell 2000 Growth Source: FMRCo as of 6/30/03

12. First time on record all 10 sectors up more than 5% Q2 Sector Performance Beaten down telecom and utilities lead the rebound Less cyclical sectors trail Economically sensitive sectors post strong returns Source: FMRCo as of 6/30/03

13. Industry Reversal: Beaten-Down Stocks Lead Rally High Beta industries suffered in bear market but rebound in 2003 Source: FMR Co. as of 6/30/03

14. Market Breadth Indicates Broad-Based Rally 84% of stocks are above their 40-week moving average 470 out of the S&P 500 stocks registered positive gains in Q2 Source: FMR Co. as of 6/27/03

15. Uptick in Mutual Fund Flows Domestic Equity Net Monthly Mutual Fund Flows After lengthy period of outflows, investors move back into stocks Source: Simfund as of 5/31/03

16. Earnings Rebound in Q1 Earnings of S&P 500 Companies 12% earnings growth in Q1 exceeded expectations Note: First Call earnings estimates Source: FactSet as of 6/30/030

17. Valuations High, Depend on Strength of Earnings Recovery Market rally drives PEs back up – well above historical average But valuations more reasonable if earnings growth meets expectations Note: Trailing earnings are Compustat. Forward earnings are First Call. Source: FactSet as of 5/31/03

18. International Equity

19. International Equities Performance Higher than the S&P 500 Rebound in Latin America and apparent SARS containment in Asia drive emerging markets ECB rate cut bolsters broad-based rally Note: All returns are gross. The above countries are represented by: Europe – MS Europe, Japan – MS Japan, Emerging Markets – MS EMF. Source: FMRCo as of 6/30/03

20. Falling Dollar Boosts International Stock Returns Trade-Weighted U.S. Dollar Dollar down 19% since early 2002 peak – and 24% versus Euro Source: Haver Analytics as of 6/30/03

21. Struggling Global Economy Anemic Q1 growth in largest foreign economies expected to pick up a bit Fastest growing region in world slowed by SARS Source: ABN AMRO, Economy.com, Lehman Brothers as of 5/31/03

22. Fixed Income

23. Fixed Income Performance Falling interest rates drive solid bond returns Credit bonds – investment grade and high yield – again lead the market Mortgage backed securities suffer from refi prepayment boom Note: The above styles are represented by the following indexes: Treasury – LB Treasury, Aggregate – LB Aggregate Bond, Agency – LB US Agency, MBS – LB MBS, ABS – LB ABS, Credit – LB Credit Bond, High Yield – ML US High Yield Master II. Source: Lehman Brothers, Merrill Lynch as of 6/30/03

24. Fixed Income Returns Driven by Historically Low Interest Rates Both short and long-term rates at the lowest levels in half a century Source: Haver Analytics as of 6/30/03

25. Shifting Expectations of the Fed Markets not expecting a Fed rate hike during the next year Fed cuts short-term rate to 1% -- lowest since 1940s Source: Bloomberg as of 6/30/03

26. Corporate Bond Yield Spreads Decline Driven by investor search for yield and corporate balance sheet clean-up, corporate bond spreads tightened further Source: Merrill Lynch, Lehman Brothers as of 6/30/03

27. High Yield: Default Rate Down, Fund Flows Up 1st half 2003 flows almost equal full year 2002 Mutual Fund Flows vs. Default Rate Source: Merrill Lynch High Yield Master II Index as of 6/30/03

28. Supply of Fallen Angels Falls Dramatically Number of investment-grade bonds downgraded to high-yield declines Source: Lehman, Merrill Lynch as of 3/31/03

29. 2Q 2003 Summary • Sharp, broad-based rally in U.S. stocks • Best quarter for S&P 500 Index since 1998 • Almost all sectors, industries and stocks participate • Corporate earnings generally better than expected • Still few signs of an economic rebound • International equities also post strong gains • Receive boost from weak dollar • Emerging markets are best performers • Fixed income • Historically low interest rates drive positive returns for bonds • Credit bonds posted biggest gains – particularly high yield 350270