I say this is odd because there has for years been a close correlation between US industrial production and the All-Share index. It has been 0.61 for annual changes between 1995 and 2015, implying that fluctuations in US output growth alone can explain almost two-fifths of the variation in annual equity returns.
With US output now lower than it was a year ago, this relationship implies that the All-Share index should have barely risen at all in the past 12 months. In fact, it's up by more than 11 per cent.
What explains this disparity?
It's possible that the relationship between US growth and equities has broken down. But this isn't wholly plausible. Common sense tells us that a strong US economy should be accompanied by rising share prices and a weak economy with falling ones.
Instead, there might be other explanations.
All-Share index and US industrial production
History tells us what these might be. Previous occasions when shares have done better than they should given the state of the economy fall into three categories.
One is when shares recover from being underpriced; this happened in 2003-04 and in 2009-10. I doubt this is relevant now, as few people claimed a year ago that shares were very cheap.
Secondly, shares can rise during poor economic times in anticipation of faster growth - or perhaps even as a cause of it. This happened in mid-1998, 2005, 2009 and late 2013. Roger Farmer at University of California Los Angeles has pointed out that equities are a surprisingly good leading indicator.
This doesn't guarantee, of course, that equities will continue to do well. But it does point to the US economy picking up, which should at worst put a floor under the market.
There is, however, a third possibility. Sometimes, rising share prices amidst weak economic activity is a sign that prices are unsustainably high. This was the case in 1999, 2006 and mid-2011.
We've a plausible reason to believe history might be repeating itself. Experimental evidence confirms what many feel - that poor returns on cash have caused some investors to 'reach for yield' and to take on excessive risk. This might have pushed share prices up too far.
Now, this is not to predict an imminent crash: overpriced markets can stay overpriced for longer than you think. What does seem clear is that the divergence between a strong stock market and a lacklustre economy might not last for very long. And while the gap could be closed by stronger economic growth, this is by no means certain.
