The Federal Reserve Won't Give Up

In November, the Federal Open Market Committee announced its intent to purchase $600 billion of Treasury securities. But the speculation over the quantitative-easing measures, dubbed QE2, heated up in July. The S&P 500 rode that speculation from July until November, good for a 16% climb in that four-month time span, as the timeline above illustrates.

Now, there is market chatter over a possible QE3 after Fed Chairman Ben Bernanke said in an interview with 60 Minutes that more quantitative easing in the U.S. is "certainly possible." That may be due to the fact that QE2, which was designed to drive down interest rates, has had the opposite effect. The yield of the 10-year Treasury was below 2.5% in early November but has now jumped to nearly 3.3%.

Some market watchers say rising rates and a strong dollar aren't necessarily a great sign for the stock market. Others disagree and instead say this is a trend that better reflects a return to normality.

"If the economy is going to grow at a stronger pace, then rates should go up and the dollar should go up," Cantor Fitzgerald's Pado says. "The last 12 months wasn't normal because the Fed was stepping in doing major moves. We're now getting back to normal. It's not one or the other. They can all go up."

Banyan Partners' Pavlik says the dollar will continue to rally because of growth in the U.S., which investors may initially take the wrong way.

"You'll see an initial negative reaction in the overall market because things are more expensive," he says. "But as growth continues on, you're going to want to be where you see more growth. You really have to pay attention to what's happening and understand why the gyrations are occurring. You want to be invested in the U.S. market because growth is a good sign."

One of the obvious risks is that the 10-year Treasury yield grows at a faster clip than the market expects. In addition, Dearborn Parters' Nolte argues that the benefit of QE2 is not finding its way into the economy because fiscal policy, not monetary policy, is needed to see more robust economic growth.

"You can have QE3, QE4 and QE5," he says. "But no matter how much you throw at it, you're not solving the debt situation. That's really the part of the economy that needs to heal. And that'll take time. The consumer gets it, but it'll take a while to get their balance sheets back in order."

For investors looking to play the currency shift, Al Frank's Buckingham says multinational global companies are way to hedge the currency risk. "We like some of the big conglomerates like United Technologies ( UTX), 3M ( MMM) or Eaton ( ETN)."

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