Risk management has become a four letter word. It has been more than two years since the S&P 500 Index has suffered a correction greater than 10% in what has become the longest uptrend in the history of markets.

Naturally, no one cares about risk management today as stocks have behaved like a risk-free asset class. If you have managed risk or maintained a diversified portfolio during this period you have looked like a court jester as every minor dip has been followed with a v-shaped rally back to new highs. But as I have been arguing in recent weeks, this benign environment is coming to an here and there is likely to be a renewed appreciation for risk management in the coming weeks and months.

The underlying force driving the unrelenting advance over the past few years has been the faith and comfort that investors have derived from the easiest monetary policy in history. Since December 2008, we have seen a zero-percent Fed Funds Rate, three rounds of quantitative easing, and an expansion in the Fed’s balance sheet to over $4.4 trillion.

But as you’ll notice in the chart above, Fed balance sheet growth is starting to flat line here as we approach the end of QE3 this month. With this in mind, investors may want to look back at how the market environment changed following the end prior rounds of QE.

The first quantitative easing program (QE1) ended in March 2010. In the months that followed, the S&P 500 Index would experience a peak to trough decline of 17%. A second quantitative easing program (QE2) was commenced later that year, and continued until June 2011. In the following months, the S&P 500 Index would experience a peak to trough decline of 21%.

We also saw a large spike in volatility following the end of QE1 and QE2 with the VIX Index moving above 40 during both occasions.

Within the S&P 500 Index, there was a clear divergence between defensive and cyclical sectors during the post-QE declines. In the three months that followed the end of QE1 in 2010, the defensive sectors (Utilities, Consumer Staples, and Health Care) performed at the top of the sector rankings while the more cyclical sectors underperformed.

We observed a similar pattern in the three months that followed the end of QE 2 in 2011, with Defensive sector outperformance. The lowest beta sector in the S&P 500, Utilities, actually posted positive performance during this period.

We also saw significant outperformance of defensive long bonds (30-year Treasuries) over stocks following the end of prior rounds of QE.

There are now only three weeks left until the end of QE. Most market participants are still saying it will be different this time. They don’t believe that stocks can go down because they haven’t seen it happen in a long time.

As I have been arguing all year, though, real money investors have already been repositioning out of cyclical areas of the market and into defensive areas ahead of the end of QE (see Fed Prisoner’s Dilemma). The most defensive areas of the market including Utilities and long duration Treasuries are widely outperforming stocks in 2014. Given this backdrop, defensive sector rotation and risk management is likely to become a more important factors for investors going forward. The environment that has been in place since late 2012 is coming to an end and with it will go the notion that U.S. equities are a risk-free asset class.

At Pension Partners, our mutual fund and separate account strategies are currently in defensive mode, with positions in defensive sectors in our equity sector rotation strategy and Treasuries in our absolute return strategy.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.