The Economy May Stink, but the Market Doesn't Care

NYSE traders
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Another lackluster quarter of economic growth is likely to have the same impact on the market as its predecessors—which is to say, not much.

Despite a prolonged period of weak improvement in gross domestic product, stocks have continued on a progressive, albeit bumpy, ride higher.

The 136 percent stock market surge over the past four years has come despite the weakest recovery since the Great Depression, and more recently signs that those expecting a period of stronger growth will be disappointed.

No matter, though, as investor—riding a wave of Federal Reserve liquidity and sentiment that the U.S. remains a safer store of money than its troubled global competitors—keep buying despite the slow economy.

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"There's just this disconnect from reality," said Kathy Boyle, president of Chapin Hill Advisors. "The high-frequency funds are just controlling this market. Anyone who's rational thinks this market is overvalued and things are slowing down."

Yet a quarter that brought such lackluster growth—2.5 percent against expectations of 3 percent—saw the stock market surge 9 percent.

Friday's letdown had little effect either way, with major averages treading water around midday.

(Read More: Oops! Economic Growth Wasn't So Great After All)

The GDP report came amid a backdrop of a so-so earnings season in which influential Dow Jones Industrial Average components Caterpillar and AT&T reported substantial slowness in their business.

"The major industrials are telling you things are not good," Boyle said. "China is in slowdown, Europe is in crisis. But la la la, we're still going to trade the market."

One of the main drivers behind the trading mentality has been the Fed and its $85 billion a month in asset purchases.

In addition to the basic liquidity, it's also fueled a belief that even if conditions don't improve dramatically, they'll be enough money around to keep equity prices floating.

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"The fundamentals are improving as a result of the QE," John Stoltzfus, chief market strategist at Oppenheimer said, in reference to the Fed's quantitative easing program, currently in its third cycle. "The glass remains more than half-full."

Stoltzfus points to improvements in the housing market that he said will lift the broader economy.

Yet those gains are happening against a backdrop of lower government spending accompanying the mandated sequester cuts that helped depress the GDP number.

At the same time, consumer spending, one of the biggest components of first-quarter growth, may not be able to be sustained considering the personal savings rate tumbled to 2.6 percent.

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Jim Paulsen, chief market strategist at Wells Capital Management, believes the market may be expecting a compromise in Washington that could mitigate the sequester effects and give the economy a lift.

"The pain's going to get too big," he said. "Our public policy is we don't do anything until we get an emergency and then we get together."

Absent changes in fiscal policy, the Fed will keep using its monetary tools, which will last as long as the market decides it can ignore some bigger economic questions.

"I don't know who's buying here. The volume is not healthy," Boyle said. "How much more can the market shrug off?"