8/8/2019 Rotschild Asset Management 2010-3Q Market Review

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Rothschild Asset Management Inc. 1251 Avenue of the Americas New York, NY 10020Phone 212-403-5460 Fax 212-403-5515 E-mail raminc@rothschild.com

Third Quarter 2010 Market ReviewROTHSCHILD ASSET MANAGEMENT

After a sharp selloff in August, the S&P 500 rebounded strongly in September, bringing its return for

the third quarter to 11.3%. The Russell 2000 also returned 11.3% for the quarter, while the RussellMidcap gained 13.3%. For the year to date, the S&P 500 is up just 3.9%, compared to 9.1% for the

Russell 2000 and 11.0% for the Russell Midcap.

Investors have been seesawing between exuberance and despair in reaction to the economic news flow.

In August, fear of a double dip for the U.S. economy escalated in response to disappointing reportson housing and consumer spending. In the following month, better news, particularly on retail sales,

contributed to one of the stock markets strongest September performances ever.

We continue to think that the economy is on track for a subpar recovery, as consumers deleverage theirbalance sheets and boost their savings. If the stock market holds its recent gains, it will have a positive

influence on the economy, boosting consumers net worth and strengthening both consumer and

business confidence. The dollar, which has been declining again since June, should also help theeconomy by making exports more competitive and imports more expensive. And additional action by

the Federal Reserve is likely, perhaps as early as November. A second round of quantitative easing

would reduce long-term interest rates, providing support to housing and other forms of investment.Some have expressed concern that additional monetary stimulus may raise inflation expectations, but

we think a whiff of inflation would actually do the economy some good by creating an incentive to

buy ahead of expected price hikes.

We are now 15 months into the recovery from the recession that ran from December 2007 through

June 2009. At this point it is normal for growth in corporate profits to slow, as the impetus from

companies moving from loss to profit diminishes. This need not be negative for stocks, unlessinvestors expectations are excessive, which they are not. Analysts estimates assume slower earnings

growth, and actual results continue to exceed expectations. The markets valuation also reflectsmodest expectations: the S&P 500 is trading at about 12 times consensus estimates for next year, for

an earnings yield of 8.3%, compared to a yield of only 2.5% from 10-year Treasuries.

The biggest positive factor for stocks is strong cash flow. Cash is continuing to build on company

balance sheets, and the pressure to deploy it is rising. With opportunities for growth relatively limited,

we expect increases in merger activity, dividend payouts, and share repurchases. Companies that cangenerate cash and deploy it effectively will be the winners in a sluggish economy, and as growth

becomes more difficult to achieve, investors are more likely to differentiate between corporate winners

and losers. In the months ahead, we expect stock prices to be driven more by trends at individualcompanies and less by oscillating macroeconomic views.

T. Radey Johnson, CFA

Chief Executive Officer

Rothschild Asset Management Inc.

October 5, 2010