Yesterday we laid out the data for you. We gave you the news stories and headlines about the UK’s coming Winter of Discontent – the one that’s already here in September – especially when it comes to energy prices.

Today, we delve into the effect on the stock market. Or rather, we look at the lack of effect on the stock market.

So far, the chaos in the economy has done pretty much nothing to stocks. That is fascinating in and of itself.

We’ve got energy companies going bust, petrol rationing, the spectre of food shortages, power and gas prices going through the roof, truck driver shortages and all sorts of carnage out there. But, stocks don’t care…?

It’s worth pointing out that, historically speaking, there is no correlation between economic booms and stock market booms, much to the confusion of almost everyone. Surely, when the economy is doing well, stocks go up?

In his book about the Asian financial crisis, market historian Russell Napier delves into this fallacy. You see, the Asian bubble was all about this misconception in the first place.

The narrative went that we were in for the Asian century, with a spectacular boom. As might sound familiar for those of you who have heard it about China more recently, companies that could stake their claim on just a tiny fraction of this boom would prosper. And investors who owned just a tiny fraction of those companies would get rich. That’s what the promoters told the punters, anyway.

Those who really believed in this story when it comes to Chinese stocks are being taught a brutally hard lesson by the Chinese Communist Party at the moment. But, that’s another story.

Back in the 1990s, investors piled into Asian stock markets on the promise of huge economic growth. And those investors got burned, big time. That was because the boom turned to bust.

The Asian century turned out to be a mirage of the same sort we saw in Southern Europe before 2008, for the same reasons. But that’s another story too.

Here’s the relevant bit of Napier’s book for today: “That there is no relation between high economic growth and returns from equity investment is a key lesson from financial history.”

Why? We’ll get to that. First, consider…

Is the converse true? Do stock market booms happen despite economic busts?

Apparently, yes…

Pandemic? It will not be a problem for long.

Tapering of central bank bond purchases? It’ll be like watching paint dry, they tell us.

Inflation? That’s a transitory problem.

China’s Evergrande? It’s nothing like Lehman Brothers.

High gas and electricity prices? They’re signs of an economic boom.

As I’ve asked many times in Fortune & Freedom, can there even be a crisis any more? In the stock market, I mean. Or have central bankers and governments got the knack at preventing them?

The post-pandemic boom in stocks has reached extreme proportions while the economic recovery has fallen from underneath it. Perhaps this only highlights what stock markets do still care about: namely the fiscal and monetary stimulus which will be used to fight off the crisis.

This might sound like a false boom given that the stimulus is artificial. But I’m not so sure that’s the right conclusion to reach this time.

So, let’s ask what does make stocks move in the first place.

Well, stocks can move for a variety of reasons, none of which are the unemployment rate, GDP growth or other measures you might presume.

Stocks can of course rise thanks to inflation. Which is really just the devaluation of the money in which stocks are measured. But this does make stocks a reasonably good option during inflationary periods. And so, if inflation is ahead of us, stocks might go up because of that.

Growing profits are another reason that stocks can rise, because profits accrue to the shareholder. Of course, not just any profit will do. After all, competition crushes profits eventually. But some businesses have a sustainable advantage of some sort. We’re talking about intellectual property, expertise, an asset like a mine, a monopoly or some other source of persistent profits.

Valuations are the most interesting angle. We’re talking about how much investors are willing to pay for an identical investment in identical conditions can vary over time. A bubble is the best example of how this can change. One minute, internet stocks are an obscure part of the market. The next, despite nothing about them changing, people are willing to pay exorbitant prices for them.

Which effect is making stocks move now?

Well, with companies going bust and the cost of production inputs surging, I don’t think it’s the anticipation of post-pandemic profits that are behind rising stock markets. The exceptions of course are the tech stocks that benefit most from the persistent pandemic itself.

Inflation and valuations are certainly very high. So perhaps people are seeking refuge in stocks from the threat of inflation.

You need to think about what this reveals about the stock market.

Does it make sense for stocks to care more about fiscal and monetary meddling than… reality?

What does it tell you about the stock market that people see it as an escape mechanism from cash and bonds?

At this rate, the last economic institution standing in Britain may well be the stock market. The economy, the cost of living and all other measures we care about will signal a crisis while the stock market booms…

Nick Hubble
Editor, Fortune & Freedom