The Stock Market Keeps Rising. The Reasons to Be Hopeful Are Also the Reasons to Worry.

Not much, apparently. The chance that a huge relief bill gets passed has risen so high that the market assumes it’s a done deal. Disappointing economic data, like weaker-than-expected jobless claims, continue to be dismissed. And optimism about our ability to vaccinate the U.S. population and end the pandemic appears to be rising.

But there is a sense of unease percolating, a sense that something is not quite right with markets. You can see it in the continued influence of retail trading, which found a new-old target in pot stocks, helping to drive shares of the ETFMG Alternative Harvest exchange-traded fund (ticker: MJ) up 42% through Wednesday and then down 26% through Friday’s close. It’s in the small-cap Russell 2000, which gained 2.5% on the week, to 2289.36, and has now outperformed the S&P 500 by 11 percentage points in 2021. And it’s there in the 10-year Treasury yield, which closed the week at 1.199%, its highest since March 2020. Do these things make sense? And if so, what do they mean for the overall market?

Part of the problem is simply the known unknowns. For instance, no one is quite sure when the economy will reopen and what it will look like. We can assume there’s pent-up demand, that workers in restaurants, retail, and other service-oriented business will have jobs to go back to, and people will want to fly to vacation destinations once again, but we won’t know for sure until it happens. “My base case is that it works out well,” says Drew Matus, chief market strategist at MetLife Investment Management. “It all boils down to the speed people feel comfortable re-engaging.”

There’s also starting to be some concern that maybe, just maybe, there may be too much stimulus coming down the pike. Details of a possible $1.9 trillion package are still being worked out, but President Joe Biden has already held a meeting with senators to discuss an infrastructure plan, which could add an additional trillion or more. That has created concerns over higher taxes to pay for the plan, as well as even higher yields, to reflect the possibility of stronger growth—and what they would mean for a market that’s already showing signs of froth.

“The biggest concern for stocks was higher taxes/regulation followed by inflation/higher rates, though the duration and severity of the pandemic remained a significant focus,” Evercore ISI’s Oscar Sloterbeck wrote about the firm’s survey of investors.

For now, though, the steady gains in bond yields have been good for the market, according to Ned Davis Research strategist Tim Hayes. He notes that the correlation between the yield on the Barclays Global Aggregate Bond index and global stocks currently sits at 0.24—a correlation of 1 means two assets move in lockstep—and has been fairly steady since the market stabilized after the coronavirus meltdown. If the correlation turns negative, which would mean that stocks and bonds move in opposite directions, it could be bad news for equities.

“If the correlation would return to inversion, it would tell us that the markets had started to view rising yields as a threat to economic growth, and in turn corporate profits,” Hayes writes.

For now, though, we’ll continue to enjoy the gifts that keep on giving.

Write to Ben Levisohn at [email protected]