Solving the puzzle of rising markets
It seems nearly every day we get disappointing news about the UK economy. But still, investors don't seem to care. The UK stock market has risen 10% since the start of 2013, and is now higher than it has been since the US housing market bubble burst in 2007.
Yesterday was a case in point: the stock market went up again, on a day that forecasters started to seriously contemplate the possibility of a "triple dip", and the pound fell more than 1% against the dollar.
Some would say this is just another example of financial markets living on another planet from the rest of us. I've chosen to find it comforting - a reminder that the companies in the FTSE 100 only make about 20% of their sales in the UK. So our companies can do well from growth in other parts of the world, even when the domestic economy is flat.
But, as Goldman Sachs points out today in a research note, there's another, simpler side to the story: namely, that fall in the value of the pound. The market might be going up in sterling terms, but if you take a more global perspective, UK shares have not really performed well at all.
Most global investors measure their return in dollars. If you do that, the performance of the UK market since the start of the year ranks 15th out of the 20 largest stock markets, and below all the European markets other than Italy.
As you can see from the bar chart, Japan has managed to perform well, even in dollar terms, despite the yen falling even further this year against the dollar than the pound has.
It's a bit odd that the UK has not managed the same trick. With so many FTSE companies earning more than 80% of their sales abroad, you would think they would be doing at least as well as other markets, in dollar terms, if not rather better.
The Goldman Sachs folks think that might still happen. Looking back, they find it usually takes five to six months for UK markets to start to perform well in dollar terms after a big fall in the currency.
They also point out that the FTSE 100 has been hampered, lately, by the fact that about a quarter of its market value is tied up in the oil and mining sector. The broader FTSE 250 index has been doing better, in dollar terms, for a while.
So the UK's cosmopolitan stock market may yet deliver a healthy return to global investors this year - even if we don't see much in the way of growth here at home.
You might or might not find that comforting; it probably depends on whether you live in one of the roughly two-thirds of households with pension or Isa money invested in UK stocks.
For me, the big puzzle is not the UK stock market's performance, but the continued strength of markets across the Channel. Most European stock markets are more domestically oriented than the FTSE, and the domestic economic news coming out of Europe has been even worse, on balance, than it has been in the UK.
I've talked about this before, I realise. But in stock markets and (especially) the market for government debt, investors seem to be counting on the European Central Bank to make everything come good in the end, whatever happens to the domestic economy in the meantime, and whatever the popular pressure on governments to change course.
It's good news for European policy makers that their plan to save the euro still commands so much market confidence, even as large parts of the continent plunge deeper into recession. But if you're looking for a market puzzle, that is where I would begin.