So how does this play out for the investor? In general, financial markets have embraced every single sign of U.S. central bank willingness to stay in the zero-percent policy universe. In contrast, as much as people like to tell you that Fed discussion of rate hikes has been a sign of economic confidence – one that will only push stocks higher – the evidence suggests otherwise. Since QE3 ended less than four months ago, S&P 500 VIX volatility has spiked above 20 on three occasions. And why have U.S. stocks rallied as well as they have in February? Economic data have been thoroughly abysmal, raising investor hopes that the zero-percent rate party will last throughout 2015.
U.S. stocks should continue to perform admirably, as long as the Fed effectively communicates its virtuous restraint. Ultra-low borrowing costs should continue to favor Vanguard High Dividend Yield (VYM) and iShares USA Minimum Volatility (USMV), though I might wait for slightly more significant pullbacks to enter new positions.
Probable Fed restraint as well as relative value with comparable sovereign debt abroad collectively benefit U.S. treasuries. You should use the recent pullback in U.S. treasuries as a fortuitous moment to buy the dip. The iShares 20+ Year Treasury Bond ETF (TLT) should have little trouble garnering support at its 100-day trendline.
