Remember Relative Value One by-product of the Federal Reserve’s loose monetary policy is the widespread positive returns that numerous asset classes have been able to experience.

For instance, from March 9, 2009 (the closing low on the S&P 500), thru Dec. 31, 2012, the cumulative returns of the SPDR Barclays High Yield Bond ETF (JNK) and the SPDR S&P 500 ETF (SPY) have been 128 percent and 127 percent, respectively. Whether your chosen investment was high-yield bonds or the 500 stocks in the S&P 500, returns have been identical since the bottom.

To extrapolate that analysis further, let’s look at some other ETFs, along with their trailing three-year annualized returns:

Other than the Barclay’s Aggregate Bond Index, investors have been able to generate double-digit annualized returns over the last three years thru a variety of asset classes.

However, an interesting shift has taken place over the last three months, as you can see by the same ETF returns on a trailing three-month basis:

Why the change? Obviously, it is impossible to know with certainty, and three months does not predict the future. However, consider a few data points.

First, while the S&P 500 is overvalued compared to its own history, relative to other asset classes (with Treasury bonds being the poster child), the S&P 500’s valuation looks attractive.

Furthermore, cash is trash, as the average taxable money market fund in the United States is currently yielding 0.02 percent, compared with 3.05 percent in February 2008. Investors are also probably recalling history, as the current falling interest rate cycle of 1982-2012 was preceded by a rising rate/higher inflation period of 1958-1981.

In a nutshell, falling interest rates and mild inflation provided strong tailwinds for fixed income, allowing comparable real returns for equity or fixed income investors.

However, the prospects of rising rates and higher inflation can turn the tailwind into a headwind for bonds, widening the performance gap, as demonstrated in the 1958-1981 cycle.

Perhaps a rotation is occurring, as investors become more selective in their choices, knowing that the future will differ from the recent past.

Being overweight in fixed income and gold has not led to severe underperformance over the past three years, as the aggressive Fed policy has lifted returns everywhere. This could change going forward, as investors seek out optimal ways to generate returns that can outpace inflation.

Mark Sorgenfrei Jr. is vice president and investment analyst for Waddell & Associates Inc.