What's Up With Stimulus Stocks?

Stocks are bouncing around today despite news the Obama Administration is considering an absolutely huge stimulus package that could be worth some $850 billion.

A bit of context from Bloomberg:

Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the U.S. economy sinks deeper into recession, an adviser to the president-elect said.

Obama’s transition team believes the amount, about 6 percent of the U.S.’s $14 trillion economy, is needed to reverse rising unemployment, said the adviser, who spoke on condition of anonymity. The sum would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.

Pelosi and Reid were kicking around spending plans worth between $400 billion and $600 billion, and that gave investors a buy sign back in early December. So, if we now expect stimulus to be substantially higher (and still have no concrete evidence of where exactly that money will go other than vague discussion of roads, healthcare, renewable energy, etc.), shouldn't we be seeing more of a rally in stimulus-related stocks?

A few possibilities: First, the market may have already priced in the stimulus bump. Oft-touted infrastructure plays like smart-meter maker Itron (ITRI) are up more than 40 percent in the last month. Heavy engineering and construction firms like Jacobs Engineering (JEC) and Fluor (FLR) are up 62 percent and 48 percent respectively. Second, while the stimulus payout may be growing, the economy is getting worse. Picking stocks based on government spending alone can't be done without considering how the economic woes that caused such massive intervention in the first place will translate to lower profits overall, even for companies who reap the stimulus benefits.