By Caroline Baum  Published: Mar 3, 2017 8:33 a.m. ET

The U.S. stock market has been positively giddy over the prospect of lower taxes, reduced regulation and increased government spending under a Donald J. Trump administration. The bond market, which sold off initially on expectations for the same, is taking a more measured approach. Which one will prove to be more prescient?

Following the Nov. 8 presidential election, stocks soared and yields rose. The yield on the 10-year Treasury note spiked from 1.86% to almost 2.6% in mid-December. Given fractures in the Republican Party over Trump’s agenda and the Democrats’ resistance, it started to look as if there might be less to the reflation trade than meets the (stock market’s) eye. Long-term yields worked their way down to 2.3% last week.

Late Tuesday, New York Federal Reserve President Bill Dudley, who is always billed as “a close associate of Chairwoman Janet Yellen” to inflate the importance of what he says, implied that a March rate hike was a distinct possibility.

Yet there is still a wide gap between the stock market’s ebullience — 14 records in the last 15 days for the Dow Jones Industrial Average DJIA, +0.02%   — and the bond market’s relative caution.

Stocks seem to be mirroring the optimism reflected in surveys of consumers and small businesses. Consumer confidence stands at a 15-year high, according to the Conference Board’s measure, and a 13-year high, according to the University of Michigan survey.

The Dow Jones Industrial Average crossed 21000 for the first time Wednesday morning. WSJ’s Paul Vigna and Tanya Rivero discuss the market’s response to President Trump’s policies and what still concerns traders about the U.S. economy. Photo: Getty

The National Federation of Independent Business’s small-business-optimism index soared after the election and remains at a 13-year high. The response was the biggest post-election spike in history, according to Jim Bianco, president of Bianco Research.

The survey data imply “a singular positive event, according to consumers and businesses: the election of Donald Trump,” Bianco said in a recent client webinar.

The hard data are much less compelling. With one month, and lots of data revisions, left in the first quarter, the Atlanta Fed’s GDPNow model is forecasting 1.8% growth.

A similar discrepancy exists between the optimism reflected in manufacturing surveys, both national and regional, and actual data on durable-goods orders, capital spending and industrial production.

Of course, Trump has been in office for less than six weeks, so actual output may catch up with the stock market’s expectations for robust sales and profits. Still, “campaigning is different from governing,” as President Barack Obama instructed the president-elect in November. Trump is starting to realize as much. As he himself put it on Monday following his meeting with health-insurance executives, “Nobody knew health care could be so complicated.” (Actually everyone who has even minimal experience in the field knew.)

Trump addressed a joint session of Congress on Tuesday night to outline his agenda. The president said he will ask Congress to approve a $1 trillion infrastructure investment, financed with public and private capital and adhering to the core principles of “buy American, and hire American.”

He didn’t say when. Behind the scenes, there has been talk of tabling infrastructure spending until 2018 in deference to other priorities, including repealing and replacing the Affordable Care Act. A quick fix seems increasingly unlikely in the current environment.

It isn’t just Democrats who are challenging the Republican plan. Rep. Mark Walker, who heads the 170-member Republican Study Group, recommended that his fellow conservatives oppose the draft of the House health-care plan, which dismantles the individual mandate, income-based subsidies, Medicaid expansion and taxes on the wealthy to subsidize benefits.

The stock market is hoping for a growth spurt. The bond market appears to be focused on the economy’s potential: potential growth, that is.

Assuming no Trump-initiated trade war, the U.S. economy could very well experience a short period of growth exceeding the 2.1% post-recession average. It cannot achieve faster growth over the long run without a dramatic increase in productivity and hours worked. That may be the bond market’s operating premise.

Productivity growth has been depressed since 2004 while labor-force growth is well below its post-war average as the baby boomers retire. Unless the Trump administration and Congress can come up with ways to jolt the two inputs that determine potential growth, the economy will be stuck in low gear. Both the Fed and Congressional Budget Office peg potential GDP at around 1.9%.

If Trump succeeds in lowering the corporate tax rate and reducing regulation, entrepreneurial activity and productivity could get a boost. But it will take a lot of geniuses tinkering in the family garage to create the next generation of technology that will enable us to produce more with less.

The simplest way to raise potential GDP is to boost labor-force growth through a skills-based immigration program. Prior to Trump’s speech last night, I would have said the chances of that happening were slim to none.

But Trump talked about immigration reform, including a “merit-based system” that admits self-supporting workers. That would represent a radical about-face for someone who campaigned on building a wall to keep immigrants out.

Politics aside, the stock market remains in La-La land while the bond market may find support from the massive net short position speculators are holding in long-term Treasuries, according to data from the Chicago Futures Trading Commission.

If stocks should decide a more cautious approach is warranted, the resulting inflow into risk-free Treasuries could catch the bears off guard and send yields tumbling yet again. Nobody knew markets could be so complicated!