NEW YORK (TheStreet) -- The economy is now really, seriously beginning to move --but it may mean less for the stock market than you think.
At least, in the short term, Wednesday's report the economy grew at a 4% annual pace in the second quarter backed up all manner of bullish predictions -- that growth this year could still get close to 3%, that this year's pace of 230,000 new jobs a month should push the unemployment rate near 5.5% by year's end, even that the economy could grow at close to 4% next year. Friday's jobs report will tell us more about how realistic all of that is.
But even if all that happened, this would still not be an especially strong recovery by historical standards. Since the Standard & Poor's 500 has jumped 38% since the beginning of 2013, a lot of the good news is already in stock prices.
The first problem for the market is that stocks are relatively expensive. At 19 times trailing earnings, the S&P 500 is near its 1980s peak and around the last sane levels of the 1990s, before the bubble mania of 1999 and early 2000 set in.
Neither do bonds look like any refuge. While there's no consensus on how rapidly Janet Yellen and the Federal Reserve may raise interest rates, they won't be going lower. Ten-year Treasurys are yielding 2.59% a year -- a third lower than they were five years ago when the economy was still in collapse. A serious foreign shock is about the only thing that would make growth slow enough for bonds to rise, as rates sag, again. Even another epic winter wouldn't do much for bonds -- by fall, the upward trend in growth, and interest rates, will be clear in a way it wasn't when the weather sucked the economy into its vortex last December.
Rates are likely to rise, a little sooner than many expected, but they won't rise much. If Yellen & Co. have made one thing clear, it's that they are willing to absorb inflation that flirts with the central bank's 2% annual target rate, or even exceeds it slightly, in order to absorb the three million workers who are working part-time because they can't find full-time work. (Actually, there are 7.5 million, but there were 4.4 million near the peak of the last cycle).
So while rates may rise as soon as March, as economist Joel Naroff predicts, they won't rise rapidly unless inflation cranks up. That protects stocks' recent gains to a degree, but it warns retirees that they shouldn't count on fatter interest payments on bonds just yet. Yields on 30-year bonds are actually 0.32 percentage points lower than a year ago, reflecting how calm the markets are about inflation risk.