When will the Federal Reserve curtail or end its economic stimulus program? That’s been the question of the month – and year. And rightly so. By buying some $85 billion worth of Treasuries and mortgage-backed securities each month, the Fed has kept interest rates low, fueling major rallies in both US bonds and stocks.

Worth noting: returns on US bonds and stocks are starting to diverge, as an eventual end to the Fed’s stimulus program starts to be factored into pricing.

Interest rates have begun to tick up, pushing down the prices of bonds and mortgage-backed securities. The yield on 10-year Treasuries is about 2.2 percent now vs. 1.8 percent last month. Meanwhile, stocks continue to chug along, with the S&P 500 up nearly 15 percent so far this year.

The decoupling of returns for US fixed-income vs. equities is likely to continue. Both have profited tremendously from falling interest rates. But now, given the likelihood that interest rates have bottomed, stocks have way more traction.

For high-quality companies (and their stocks), the benefits of low rates will be ongoing – lower financing costs locked in for years, more cash on hand. The same can’t be said for bonds, since their payouts are fixed.

Should you sell all your bond holdings? NO. Bonds may not be the life of the party, but they’re not dead. Inflation remains low, making a dramatic rise in interest rates unlikely. Still, some bond fine-tuning may be necessary now (see page 9 inside and page 3 of our June 2013 issue for suggestions). And remember: the point of fixed-income is not to one-up stocks; it’s to counter the risk of stocks through a steady and reliable payout.

Stocks Keep Dancing

The US is facing stubborn, structural unemployment and real incomes continue to stagnate. However, our economy has come out of the Great Recession in better shape than Europe, Japan and even China.

Now, China’s economy is showing signs of stabilizing and Japan is starting to grow. If Europe can pull out of its malaise, more upbeat global-growth forecasts are likely to provide further lift here at home, even if the Fed does turn off its stimulus spigot.

The German government has shifted ever-so subtly toward structural reforms to promote growth, instead of just budget cuts. And if Chancellor Angela Merkel’s coalition is re-elected in September, which we think likely, this will allow for more overt pro-growth moves. As Europe shifts course later this year, US stocks are likely to catch a tailwind.

Our advice to you remains unchanged: focus on high-quality companies in growing markets and stay diversified. This issue is full of ideas on how to do just that.