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Why has the UK stock market disconnected from the economy?

Despite the fact that UK GDP (Gross Domestic Product) was a disappointing -0.4% during the last quarter, against an expectation of 0.2% growth, the UK stock market ended on a high today adding 60 points to 5268. But why is the UK stock market racing ahead when the UK economy appears to be going into reverse?

As we have mentioned on numerous occasions, the UK stock market tends to look at least nine months ahead and many investors seem to be discounting short-term problems with the UK economy and looking to the future. However, when you see the performance of the UK stock market over the last two or three months it is becoming apparent that some investors a wearing "rose tinted glasses" and are possibly missing the wider picture.

Unless the economy shows signs of recovery in the short to medium term it is unlikely, and unhealthy, that the UK stock market will push too far ahead from its current level. Indeed, if we see no signs of an upward trend in the UK economy in the short term, some investors may decide to take profits and move back to the sidelines until the economic situation becomes clearer.

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