Why This Bull Market Shows No Sign of Ending Soon

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The economic data this past week largely underscored the market’s apparent conviction that a rapid recovery is under way. Cyclical equities rose, bonds fell, and investors wrung their hands about higher yields threatening the stock market.

January retail sales jumped 5.3% from December and 7.4% from a year earlier, handily beating expectations—and the January producer-price index likewise surprised to the upside. Thursday morning’s initial jobless claims figures for the latest week broke a several-week trend of declines, while the prior week’s tally was revised higher. But then on Friday, February PMIs from IHS Markit decidedly underscored the health of the recovery: The manufacturing subindex held just below its recent peak, while the services component hit a six-year high.

The Atlanta Fed’s GDPNow model now points to real gross-domestic-product growth at a whopping 9.5% annualized rate in the first quarter. It had been below 5% just 10 days earlier, and it comes before any boost from a $1.9 trillion stimulus package.

The

Dow Jones Industrial Average

rose 35.92 points, or 0.11%, to 31,494.32 this past week. The

S&P 500

index slipped 0.71%, to 3906.71, and the

Nasdaq Composite

lost 1.57%, to 13,874.46. The yield on the 10-year U.S. Treasury note, meanwhile, ticked up 0.145 percentage point, to 1.344%, as the price of the securities fell. Indexes near record highs and rising yields has been the basic dynamic since late last year.

“The market is painting a picture of optimism: strong growth and rising, but not troublesome, inflation. We agree,” BofA Securities U.S. economist Michelle Meyer—who sees GDP growing by 6% in 2021—wrote on Friday. “But there is a delicate balance: strong growth could prompt a faster rise in rates, driving up borrowing costs and weighing on risky assets, limiting upside to economic growth.”

That “delicate balance” means investors may soon be playing the kind of mind games many will remember from the first half of 2019. Back then, good economic data wasn’t always good news for the stock market, because it seemingly lowered the odds of the interest rate cuts the Federal Reserve ultimately followed through with. If the 2021 economic data continue to surprise to the upside, faster inflation and the speed of the recovery could force the Fed to take its foot off the gas sooner than expected, the thinking goes, and that could threaten the bull market.

This time is a bit different, however, for several reasons. Benchmark interest rates are as low…