Two contradictory things can happen simultaneously. But this situation may not continue indefinitely.

Investors are contemplating seemingly contradictory trends in financial markets, wondering how long they can persist. President Trump's tariff policies have begun to shake the real economy, yet the stock market continues to climb as if a prosperous era is about to arrive. Does this make sense?

At least for now, investors apparently think it does.

Buyers continue purchasing, with the broader S&P 500 index (^GSPC) hovering near historical highs, while the narrower Dow Jones index also approaches its first record closing level since last December. The stock market has surged since Trump abandoned high tariffs in early April in favor of a more moderate country-by-country trade agreement strategy.

But not everything is well. A headline on August 15 told readers: "The stock market is becoming frightening." Economist Burton Malkiel pointed out that stock valuations have reached their highest levels in 230 years and warned of "worrying signs that investor optimism may have gotten out of control."

It's not just mainstream media expressing concern. Fund managers at Morgan Stanley, Deutsche Bank, and Evercore are preparing clients for potential stock market declines of 10% to 15%. Goldman Sachs believes there is "potential liquidation risk" if any factor breaks the fragile "Goldilocks" state. In a video to clients on August 14, Tom Lee, co-founder of investment firm Fundstrat, emphasized the recent surge in wholesale inflation and stated that "yet the stock market has barely moved."

The current situation appears to be a divergence between the stock market and the real economy. Signs of economic slowdown include significantly slower job growth and surging wholesale inflation primarily triggered by Trump's new import tariffs. Consumers expect rising producer costs to push up retail costs in the coming months, driving overall inflation from the current 2.7% to around 4.5%. This is hitting overall consumer confidence.

It's not particularly concerning for stocks and the economy to move in slightly different directions. As Sam Ro pointed out in his TKer newsletter, the stock market often plays the role of a "discounting mechanism" for evaluating future growth and earnings. Some Wall Street analysts believe the early 2025 crash - when the S&P index fell 21% from late February to early April - reflected the market already pricing in the economic slowdown factors we're currently experiencing. If true, the current rally might be telling us that economic performance will be better than the modest 1% GDP growth rate many economists predict by year-end.

Economist Ed Yardeni of Yardeni Research posed the question "Why do stock prices keep rising?" in his August 11 newsletter, then provided an answer, listing four reasons for optimism about stock values.

First, the Federal Reserve is increasingly likely to cut interest rates, a conventional response to economic slowdown. Lower rates reduce borrowing costs and help boost corporate earnings. According to the CME's Fed Watch tool, investors see nearly a 90% probability of a 25 basis point rate cut in September.

Yardeni also believes the U.S. economy remains resilient, with strong productivity growth offsetting slower employment growth. Moreover, there's growing evidence that artificial intelligence and other digital technology advances are genuine drivers of earnings growth, not just temporary trends. He predicts the S&P index will rise another 55% by the end of this decade.

If a recent correction occurs, it would obviously undermine Trump's claims that America has entered a new "golden age." Voters are already skeptical about the economy under Trump, with his economic approval rating falling from 42% in February to the current 37%. His tariff policies are unpopular, and concerns about the job market are growing.

But stock market corrections are not unprecedented, and most investors weather them well. Trying to time market ups and downs through buying and selling stocks is notoriously poor investment strategy, as market movements are often unpredictable. Even while warning that markets are frightening, the advice given is that ordinary investors can really only occasionally adjust asset allocation - timeless guidance.

Another piece of advice is equally valid: invest wisely, then worry about other things.