According to a time-tested investing adage, markets “climb a wall of worry.” It means that stocks can rise, even when investors maintain a healthy skepticism about the economic outlook. That’s certainly been the case this year. The S&P 500 has surged a remarkable 55% from the March 23^rd low—the fastest retracement in history.

At this point, however, we would expect to see some consolidation. Rather than a wall of worry, today’s market seems unfazed by the risks tied to the pandemic, the U.S. economy or the coming elections. Fueled by excess liquidity from the Federal Reserve, we’re now in the midst of an “everything rally,” where Treasury prices have soared (and yields fallen to record lows) at the same time as stock indices and gold are achieving record highs.

Such correlations are rare.

When typical trading patterns between asset classes break down, that has historically been a warning sign that a correction may be due. And those aren’t the only unusual dynamics. Here are three additional examples of current market disconnects that seem particularly ominous for market health:

• Consumer confidence is fading, even as the S&P 500 reaches record highs. Historically, year-over-year gains in the S&P 500 and changes in the Conference Board’s U.S Consumer Confidence Index match up. In fact, in the past 20 years, the dispersion between the S&P and consumer confidence has never been this wide.
• The just-released headline confidence number fell to a six-year low, worse than the reading in April during the nadir of the economic shutdown. And the S&P reached a new all-time high of 3508 on August 28th. It’s now about 5% higher than the pre-COVID high in February and up 23% from this time a year ago

• Some broad U.S. economic readings are improving, while stock market breadth continues to narrow. An index of U.S. economic surprises has reached a record, with the rebound in manufacturing and strong housing sales and durable goods orders all supporting our thesis for V-shaped economic recovery.
• But rather than seeing the rising tide lift all boats, correlations between sectors in the S&P 500 index are at an all-time low. Cyclicals and traditional value sectors are lagging market leadership, which is dominated by a small group of large-cap growth winners, mostly in tech. Financials, which typically perform well during economic rebounds, are languishing.

• Treasury yields are extremely low, yet stocks typically bought for their high dividend yields are underperforming. When Treasury yields fall, stocks in sectors that tend to be less volatile and offer high dividends usually outperform as investors seek “bond proxies.”
• But lately, bond proxies, such as real estate investment trusts, utilities and consumer staples, have been left behind. Of course, commercial real estate has been hard-hit by the COVID-19 recession, but this dynamic still seems incongruous to me, especially given the outlook for continued low rates and weakness in financial stocks.

It bears repeating: This crisis is unlike any we’ve seen in modern history. The gargantuan fiscal and monetary policy response may largely help to explain these divergences from normal patterns.

While most economists forecast a 5% to 7% contraction in GDP this year, government stimulus has already injected three times that amount into the economy and could swell to nearly 50% of annual GDP by next year.

However, these kinds of market disconnects tend to be short-lived. We encourage investors to look for opportunities where the cognitive dissonance is loudest. We suggest waiting for a correction in the S&P 500, then moving into sectors that are lagging now, such as financials, industrials, materials and health care, which are likely to outperform once investors more enthusiastically embrace the V-shaped recovery that’s starting to emerge.