Economy stinks. Why's the market happy?

NEW YORK (CNNMoney.com) -- The markets have a funny way of responding to bad economic news.

Stocks are up again Monday, following Friday's mini-rally on the back of a dismal jobs report. The Dow is now above the psychologically important 11,000 level, while the S&P 500 is inching closer to 1,200. It hasn't traded above that since early May.

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At the same time, bond investors are also giddy with excitement.

The Treasury markets were closed Monday for the Columbus Day holiday (Viva Italia!) but bond prices rose Friday. That pushed the yield on the benchmark 10-year note down to 2.38%. At one point, the rate even hit a new 52-week low of 2.33%. (Bond prices and yields move in opposite directions)

The rationale behind all the rallying appears to be that the disappointing labor market figures now give the Federal Reserve a clear reason to announce a new round of Treasury purchases -- its so-called quantitative easing measures -- at its next meeting on Nov. 3.

That makes some sense. Investors clearly want to see the Fed take aggressive action to ensure that the economy doesn't slide into another recession. But how much longer can stocks and bonds continue to move higher on poor economic news?

"There was not a lot of good news in the jobs report. When you're this late into an economic recovery and you're losing 95,000 jobs, that's not a reason to celebrate," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala. "Even the private sector jobs that were created were in a lot of low-paying sectors like restaurants, leisure and temporary workers."

With that in mind, some experts think stocks could keep climbing in the short run -- but they are worried that the rally could quickly run out of steam once the Fed finally tips its hand about the size and scope of any new bond buying programs.

"I am not sure how long this rally will play out. I'm nervously bullish on stocks," said Paul Nolte, managing director with Dearborn Partners, an investment firm based in Chicago.

"We really need to see good economic data that shows momentum starting to turn. The market is happy the Fed is likely to do something, but people aren't worrying about whether it will actually work until later," Nolte added.

David Joy, chief market strategist with Columbia Management in Boston, agreed. He said it's hard to bet against stocks right now but conceded that the market's recent move is more about waiting for the Fed than any real optimism about the economy.

"The rally is funny since it's somewhat artificial. Is it driven by solid economic fundamentals showing that things are improving? The answer is clearly no," Joy said. "In the short run you just have to be along for the ride. But for the long run, it makes me a little anxious."

Norris added that investors may be embracing stocks again because they are dissatisfied with the paltry returns they are getting in bonds, money market accounts and other "safe haven" investments.

"Investors are impatient. A lot of them are viewing what's going on in the markets and think it's riskier to not earn anything," he said. "It's not that people love the stock market right now. But cash sitting in the bank and earning nothing is not a good call."

Still, if that's the case, why are bonds also rallying? Norris said that's merely a matter of investors realizing that it's silly to start selling when it's becoming more obvious that the Fed is going to step in as a buyer of last resort.

That may be the reason why investors have also flocked to commodities lately. Gold keeps hitting all-time highs and oil has recently popped back to above $82 a barrel after falling as low as $65 in mid-May.

"Isn't it odd that an almost overwhelmingly negative perspective about the financial markets and economy has suddenly turned all rosy?" asked Bruce McCain, chief investment strategist with Key Private Bank in Cleveland.

And as long as the Fed seems to be in deflation fighting mode, people may have more of an appetite for tangible assets like gold and oil.

But that's likely to lead to more pain for the one asset that has been left behind in the recent market move: the dollar. The greenback has fallen 8% against the euro in the past month.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.