A few months back nobody imagined that the stocks would rally if the Fed enacts a lift-off. But it happened in reality. On December 16, the Fed raised its key rate after almost a decade – though by a meager measure of 25 bps – but equities hardly paid heed and soared.

No doubt, this was a strange market behavior, but has strong reasons behind it. With the Fed giving cues of the rate hike timeline beforehand, the broader market digested it pretty well. Moreover, the Fed’s repeated vows to go slow with the hike trajectory made the global market comfortable with the move.

 
Rally Falters the Next Day… Why?
 
With that being said, we would like to note that the latest jump was short-lived in nature as the market lost steam the very next day. Volatility in the market soared over 4.2% (as depicted by the return of iPath S&P 500 VIX ST Futures ETN (VXX)) on December 17 while the fund advanced over 4.6% after hours. Among the top ETFs, investors saw (SPY - ETF report) and (QQQ - ETF report) lose about 1.5% and (DIA - ETF report) move lower by over 1.4% on the day. These funds extended losses in after-market trading.

Things are also not out of the woods globally. Broader commodities, which are linked to the U.S. dollar are lackluster. Oil prices are to feel more pressure thanks to the ongoing demand-supply issues and a stronger greenback. Higher rates would draw more capital to the country, thereby boosting the U.S. dollar against the basket of other currencies. Also, a strong greenback would make exports pricier.
 
In any case, the U.S. manufacturing sector is reeling under pressure for quite some time now. Now the greenback-induced woe would compound their suffering. Thus, the market may seem steady initially and appears to absorb the first rate hike easily, but is less likely to hold their head high in the medium term.
 
Tepid Corporate Outlook for 4Q15 & 1Q16
 
In fact, several market experts including Goldman Sachs see 2016 as a down year for stocks. Higher interest rates post lift-off will result in a stronger greenback which will weigh on the profit outlook of multinationals having considerable exposure to foreign lands.

As per Zacks Earnings Trend issued on December 4, 2015, the S&P 500 earnings are expected to slip 6.5% in the final quarter of 2015 on 3.4% lower revenues while earnings are projected to fall 0.8% on 2% revenue gains. From second-quarter 2016 onward, both top-and-bottom lines are expected to grow hand in hand.

This leaves an uncertainty for the near term. Plus, Goldman hints at the overvaluation of stocks at the current level. Added to this, Goldman indicated that P/E has a propensity to decline 10% in the six months after the first Fed lift-off (read: Goldman Raises Yellow Flag on 2016: ETFs to Buy).
 

Not to Worry; Look At Alternative ETFs

If any sudden downturn eclipses the market, investors have products to play and stay afloat. Investors can tide over the abrupt stock market volatility with alternative or diversified ETFs. Further their low correlation with the market makes them attractive as portfolio diversifiers for better risk-return performance over the longer term (read: Expect Volatility in Q4? Try These ETF Ideas).

QuantShares US Market Neutral Anti-Beta (BTAL)
 
This fund invests in low beta securities and simultaneously in short high beta stocks of approximately equal dollar amounts within each sector. It seeks to deliver the spread return between low and high beta stocks. This can easily be done by tracking the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index (see: all Long/Short ETFs here).

This approach results in long and short positions in 200 stocks, in equal proportions. The fund is expensive, charging 0.99% in fees per year. BTAL is unpopular having AUM of $8.3 million. The fund is up 1.1% in the year-to-date timeframe and added over 1% post Fed meeting (read: 4 Wealthy ETFs of 2015).
 
Credit Suisse X-Links Long/Short Equity ETN (CSLS)
 
This $27.7-million fund looks to the Credit Suisse Long/Short Liquid Index. The Index is designed to correlate to the historical performance of the Dow Jones Credit Suisse Long/Short Equity Hedge Fund Index by tracking the performance of non-hedge fund, transparent market measures such as the Market Factors.
 
The Market Factors will be selected and weighted in accordance with an algorithm that seeks to approximate the returns of the target index. The fund charges 45 bps in fees and has gained over 6.2% so far this year. Post Fed, the fund returned about 0.9% on December 17, 2015.
 
First Trust Morningstar Managed Futures Strategy ETF (FMF)
 
The $12.4-million fund is an actively managed ETF that seeks to achieve positive total returns that are not directly correlated to broad market equity or fixed income returns. The fund seeks to provide returns that exceed the performance of the Morningstar Diversified Futures Index. The fund charges 95 bps in fees and was up over 0.8% on December 17. So far this year (as of December 17, 2015), the fund is up 1.1%.
 
ProShares RAFI Long/Short (RALS)
 
The $43.7-million fund tracks the RAFI US Equity Long/Short Index, which provides equal allocation to both long and short equity positions. The index currently has long positions in 233 securities with larger RAFI weights than their market cap weights and short positions in 232 securities with smaller RAFI weights. The fund charges 95 bps in fees. Though the fund has lost 7.5% year to date, it gained about 0.5% on December 17.