The Stock Market Had a Fantastic Week. Now It Needs to Drop.

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The market has gotten so optimistic that it would make even Little Orphan Annie seem like a pessimist.

Emotionally, it was a bruising week. Rioters stormed the Capitol Building and disrupted the certification of the U.S. presidential results. The Democrats won the two Senate seats up for grabs in Georgia. Friday’s payrolls report showed that the U.S. shed 140,000 jobs in December, the first decline since April, a depressing sign for anyone whose gaze extends beyond Wall Street. All three could have—should have—caused the stock market to drop.

Rationally, the bad news can all be explained away. The assault on the Capitol—it sounds like a John Carpenter movie—might have raised questions about the state of U.S. democracy, but it did nothing to impact economic forecasts or earnings expectations. Democratic control of Congress is so narrow that legislators’ hands might be tied when it comes to making market-unfriendly changes. And December’s job losses were caused by massive drops in hospitality and leisure almost entirely because of renewed Covid-19 lockdowns. When the coronavirus starts to go away, those jobs should return.

The market certainly was sanguine. The

S&P 500

rose 1.8%, to 3824.68, while the

Dow Jones Industrial Average

advanced 491.49 points, or 1.6%, to 31,097.97, and the

Nasdaq Composite

gained 2.4%, to 13,201.98. All three closed Friday at record highs. The small-cap

Russell 2000,

up 5.9% to 2091.66, left them all in the dust by notching its best start to a year since 1987.

Of course, the market’s continued rise makes little sense except under the most optimistic projections. They start with the vaccines, which should allow people to get out of their homes and back to the office at some point in 2021. And if that happens, economic growth should surge and earnings should rebound, making an expensive market—the S&P 500 now trades at 22.8 times 12-month forward earnings—look far more reasonably priced.

But what if the getting back to work signals a top for the market? It’s not that far-fetched. Retail trading has spiked during lockdown because people have the two things they need to actively engage with the market: time and money. They’ll get more of the latter as stimulus checks go out—and maybe more to come. That means there’s more money to buy

Tesla

(ticker:…