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Federal Reserve Halts Bond Purchases; What’s Next for Stocks?

The Federal Reserve last week announced the end of its program to boost the economy through the purchase of treasury and mortgage bonds. Spanning more than five years, the program injected trillions of dollars into the financial markets, helping to lower interest rates, boost the earnings-led recovery in U.S. stocks, and suppress volatility across financial markets.11.7.14

We believe U.S. stocks can continue higher without bond buying by the Fed. However, the recent combination of above-average stock returns coupled with below-average volatility (adjacent chart) is unlikely to continue. Absent extraordinary stimulus, stocks are likely to experience more modest gains along with higher volatility.

The Feds change of course may also affect a stand-out aspect of the current market cycle, which is the dominance of the S&P 500 versus most other asset classes. Over the past three years, the 19.8% annualized return for the S&P 500 towers above the 9.7% return on foreign developed stocks and 0.7% return for emerging markets. Even so, valuations for foreign stocks appear increasingly attractive relative to the U.S. For this reason, we continue to recommend that investors maintain broad diversification beyond U.S. large cap stocks.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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