May 2007

2007 Stock Market Outlook Update - Time to Buy, Sell or Rebalance?

As it stands right now, there is much debate in the investment community about what lies ahead in 2007 for the financial markets. It appears that a case can be made for both “The Bulls”, who see equity markets continuing their upward trajectory and “The Bears”, who fear that troubles lie ahead. Below we state the case for both sides.

The Bull Case

Stock market valuations are at their lowest level in almost 20 years on a price/earnings basis. Corporations are flush with cash and are returning cash to shareholders via dividend hikes and aggressive share repurchases. Mergers and acquisitions are at record levels and the deals are getting bigger. In terms of interest rates, the Federal Reserve is likely to cut rates in the next few months. Finally, unemployment remains near record lows with wage growth still strong. Certainly, one can make the case that given tame inflation, relatively low interest rates and a stable economy, the prognosis for the stock market is still attractive.

The Bear Case

Housing market woes, a slowing domestic economy and less robust growth in corporate profits highlight the case for “The Bears”. Housing prices have peaked in many markets and have actually declined in some areas of the country. A rising supply of homes available for sale is contributing to the price declines and rising foreclosures could increase this supply even more. Commodity prices continue to exert upward pressure on inflation. For example, energy demand has both explicitly (via oil and natural gas prices) and implicitly (rising ethanol demand which leads to higher corn prices) led to a decline in purchasing power. Geopolitical risks are omnipresent. A major supply disruption could dramatically impact prices at the pump, given the already tight supply of crude oil. In addition, the current Fed policymakers have to contend with former chairman Alan Greenspan, who recently placed odds on a 1-in-3 chance of the U.S. slipping into a recession by the end of the year.

RiverPoint’s Recommendation

History has shown that economists and strategists are often wrong more than they are right. The well known economist Paul Samuelson said, “Economists have predicted nine of the last five recessions.” At RiverPoint Capital, we understand that attempting to predict the direction of the economy is akin to trying to predict the weather. As such, we put our efforts into examining the fundamentals of the market and the economy. The fact is that stocks have risen nearly 5 straight years and are near a 6½ year high. Corporate earnings have grown at double-digit rates for 17 consecutive quarters. In addition, real estate prices have risen faster than wage growth and affordability, adding significantly to household wealth. Instead of reinvesting cash into new business projects, corporations are repurchasing shares and thus depriving the U.S. economy of an important growth engine. Democrats have gained control of Congress, and there is a good probability that the current dividends and capital gains tax rate, now at 15%, will be amended.

Though we have confidence in “The Bull” case presented earlier, we believe investors should take advantage of some of the gains they have experienced over the last four years, particularly over the last six months, by capturing some of their profits. Consequently, we are recommending a shift of about 5% from equities into bonds and cash. The areas we are looking to reduce include the financial, media and retail sectors. We believe these sectors will experience the most difficult earnings comparisons year over year, which would disappoint investors. By investing the proceeds into bonds, alternative investments and cash reserves, we are positioning ourselves to take advantage of opportunities as they occur when the economic and financial market outlook becomes more favorable.

We hope you find this update helpful and if you have any questions please feel free to contact us.

RiverPoint Tops $1 Billion in Assets Under Management

Our firm has reached a key milestone in its history, and we have you – our clients – to thank. RiverPoint Capital Management has grown client assets under management from $440 million at the end of 2002 to $1 billion. This equates to an annual growth rate of 21% per year! Our top ranked investment performance is the bedrock of this growth. We are grateful for our client loyalty which is at an impressive retention rate of 99%.

Thank you for your continued confidence in RiverPoint Capital Management.

Market Summary	4/30/07	YTD Price Change
Dow Jones Industrial Average	13,062	4.8%
Nasdaq Composite	2,525	4.5%
Standard & Poor’s 500 Index	1,482	4.5%

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