Reversal of Fortune for Stocks

Peter Cardillo, chief market analyst at S.W. Bach, echoed this sentiment. "If rates go up by 0.25% or 0.50% by June, it is not going to have a big effect, because rates are extremely low."

Awad predicts excess returns will be generated by careful stock selection rather than a strategic sector rotation. "Higher rates will work to cap valuations, making it a stock picker's market." As interest rates increase, valuations will turn less attractive as future earnings are discounted at a higher rate.

Cardillo doesn't recommend loading up on any one sector either, but feels that those that are highly sensitive to rates will feel pressure. "The Fed is just hinting at [a hike], but hasn't made a decision yet. Therefore, I am not sure this is going to be that negative for the market [as a whole], except for homebuilders and utilities."

Nevertheless, there could be rough seas ahead, Cardillo warns. As evidenced by Wednesday's wild fluctuations, the financial markets are likely to be highly volatile, as professional investors attempt to decipher the direction of future Fed policy. Not only will experts examine upcoming policy statements, but the minutes from the prior month's FOMC meetings could be big market-movers as well.

For the retail investor looking to insulate his portfolio from heightened volatility levels, Cardillo recommends companies with very stable earnings, such as Boeing (BA Quote), Kraft (KFT Quote), Pepsico (PEP Quote) and Coca-Cola (KO Quote).

Movers

In earnings news Thursday, drugmaker Eli Lilly(LLY Quote) reported in-line fourth-quarter earnings of 67 cents a share on a sales increase of about 17%. The shares were up $1.48, or 2.2%, to $68.40.

Boeing earned 50 cents a share in its quarter, beating analyst expectations by 4 cents; the aerospace giant posted a profit of 71 cents last year. The stock rallied 76 cents, or 1.8%, to $42.30.