If you reviewed the headlines in the first quarter, “Earthquake, Tsunami and Nuclear Meltdown in Japan”, “Turmoil in Middle East and North Africa” and “106 Dollar Oil”, you would have expected frightened investors to sell risky assets and buy Treasuries.This was not the case as the S&P 500 produced its best first quarter return in 13 years, climbing 5.4 percent. The MSCI World Index rose 4.3 percent despite a 4.6 decline in the Japanese Nikkei 225 in March. At the same time, Treasuries declined, with the US five-year yield climbing to 2.28 percent from 2.01 percent at year-end.So what caused this dichotomy? There is an old trusted stock market rule on Wall Street that says, “Don't fight the Fed”. Quite simply this means that the stocks normally go higher when the US Federal Reserve is stimulating growth through monetary policy. Despite signs of a recovery in some sectors of the US economy, the Fed has made it clear that they will keep the federal funds rate at historic lows until the weak employment picture in the US improves. This stimulus has been a large reason why corporate profits have been stronger than analysts had expected. Monetary stimulus has also been part of the reason why the German economy grew four percent in the fourth quarter despite problems in peripheral European countries.The risk going forward is what happens to the party when the host turns off the music? The ECB has already indicated that they will increase interest rates to fulfill their primary mandate of controlling inflation. The economies of the weakest European countries are vulnerable due to mandated austerity programmes to bring their fiscal deficits in line. Across the pond, the US added 230,000 private payroll jobs in March after producing 240,000 private payroll jobs February. This has led some economists to predict that the US may follow the Europeans by also raising rates after the expiration of QE2 (the current Federal Reserve stimulus programme).Central banks won't keep lending rates at current levels forever and the question is, how will they manage the transition to higher rates? What is more concerning is that many of the major stock market sell offs throughout history have occurred when the Federal Reserve has tightened monetary policy. For example, the fed funds rate rose five percent from the summer of 2004 to the summer of 2006 after four years of monetary stimulus. Many people argue that sustained stimulus from 2000 to 2004 period was a primary cause of the US housing bubble. As we are all aware the stock market lost more than 56 percent during the ensuing financial crisis. From 1989 to 1994 the fed funds rate fell from 10 percent to three percent causing the best decade for the US stock market in recent history. When the central bank tried to stop the speculative bubble by increasing the fed funds rate six times from 1999 to 2000 the tech bubble ended badly with the S&P 500 losing half its value. Many investors blamed the 1987 Stock Market Crash, when the market plunged 31 percent in five days, on the 1.25 percent increase in the fed funds rate in the preceding 10 months.It is Anchor's opinion that the stock market is not as vulnerable as the periods described above because share prices have produced returns well below historical averages over the past decade. The average annual return for the MSCI World Index is 4.8 percent over the past 10 years and the S&P 500 has only produced a 3.3 percent annualised return. Anchor's fundamental valuation analysis indicates that there continues to be value in some sectors of the markets. Furthermore, the earnings yield of equities is still very attractive compared to government bond yields in most countries. The growing middle class in developing markets creates attractive growth opportunities for many multinational companies.While valuation remains compelling, the transition from three years of monetary stimulus and the prospects of higher central bank lending rates on the horizon has caused us to remove some beta from our equity portfolios.