February 2008

Investing in Uncertain Times

Thus far 2008 has been a challenging year. Major averages have fallen roughly 15% from their October highs, and questions regarding a potential recession are seemingly raised every five minutes by talking heads in the financial press. When the entire market is acting erratically, there is little an investor can do but try to keep a level head and avoid reacting irrationally.

In recent articles in both the Wall Street Journal and on Morningstar.com, personal finance gurus encouraged investors to maintain a long-term view of the market and not to get caught up in the emotions of the moment.

Keeping a sense of how well the markets have performed in recent history is a factor investors should bear in mind. Jonathan Clements, Wall Street Journal columnist, points out in his column dated January 23^rd that “the recent decline comes after five years of healthy gains. In fact, the shares in the Standard & Poor’s 500 stock index are still up 69% since the October 2002 market low.” At an annualized rate, that 69% advance translates into yearly returns of 10.4% - still above the average equity return on a historical basis.

Volatility in the market has certainly increased as of late but not to unprecedented levels. This volatility must be contrasted with the unusual calm of the market in recent years. Granted, the past few months have been somewhat unnerving for anyone with some skin in the game, but the type of choppy action that has occurred lately has happened before and likely will recur. For example, the roller coaster ride that the Dow Jones Industrials experienced on January 24^th – when the market opened to a 350 point loss, only to recover and end the day almost 300 points higher than the previous close – was definitely not for the faint of heart. Looking beyond the rationalizations for “why” that day was so volatile, it is important to note that there have been nineteen other days in the past forty years of greater intra-day swings.

The fairly rapid decline since the recent market highs of last October is not without precedent either. In fact, over the past thirty-five years there have been two hundred and five periods of the same length (70 trading days) that featured greater declines. Still, realizing this does not make investors feel better about the stock market’s recent losses. Mr. Clements makes a reassuring point:

“A bear market is often defined as a 20% decline in stock prices. As of yesterday’s close (January 22, 2008), the S&P 500 was down 16% from its October 9^th peak. In other words, if this turns out to be a standard bear market, the pain is almost over – and there isn’t much point to bailing out now.”

Attractive valuations should give investors an additional sense of security in a time of uncertainty. At 14.8 times, trailing twelve month price-to-earnings (P/E) multiples for the S&P 500 stocks are at their lowest level since the end of 1990. And P/E’s based on 2008 expected earnings for the S&P 500 (13.5 times) are at their lowest level in over a decade. The low interest rates on Treasury bonds (3.6% yield on the bellwether 10-year bond) pale in comparison to the current S&P 500 earnings yield (earnings divided by price) of 6.8%. This disparity also addresses the relative value currently offered by equities over alternative investments. The S&P 500’s current dividend yield of 2.0% is also near its 10-year high, providing investors with an added boost to total returns. In sum, stocks appear more attractive than they have in quite a while.

However, if the economy does slip into a recession, the markets could stand to lose more in value. But the truth of the matter is that, given time, equities have always recovered from such declines and, in fact, such declines have provided opportunities for investors to realize spectacular market gains. This seems especially true now with stocks trading at such reasonable valuations and with interest rates so low.

In a January 17^th article on Morningstar.com, frequent contributor Sue Stevens reminds us once again that keeping a level head in anxious times is almost always the best course of action.

“When the stock market is doing exceptionally well, as it was in the late 1990s and 2003, many investors tend to think the trend will continue indefinitely. When the market isn’t doing as well, we’re just as likely to see overreaction again. If you think U.S. companies are still fundamentally strong and will profit in the coming five to ten years, then you should still have a stake in the stock market. . . Investing is a long-term proposition. Research your investments, remember your goals, re-examine your risk, and limit how much you listen to day-to-day market commentary. And don’t let your emotions overpower your sense of reason.”

To Ms. Stevens’ point, at RiverPoint we are fully committed to researching investments, working toward your goals and analyzing your risk parameters with you.

RiverPoint Capital Management Firm Update

RiverPoint Capital Management had an exceptional year in 2007, surpassing the $1 billion mark in assets under management. We expanded our professional staff with the additions of Cathy Ellsworth and Shari Kessler and opened up a satellite office in New York. Cathy will serve as Director of Institutional Marketing as we look to grow our business and leverage our top national performance ranking. On the high net worth side of our business, we added two new portfolio managers, Stephanie Parrish and Pamela Schmitt, CFA. We are excited about their qualifications and professionalism and expect their contributions to enhance our reputation for stellar client service and investment performance.

Market Summary	1/28/08	YTD Price Change
Dow Jones Industrial Average	12,384	-6.6%
Nasdaq Composite	2,350	-11.4%
Standard & Poor’s 500 Index	1,354	-7.8%

For information about RiverPoint Capital Management or to view our report archive visit us at www.riverpointcm.com.