Unless there is a rally of improbable proportions in the last few trading days of the year, it looks likely that all the major equity indices will end 2001 in negative territory.

This is the second consecutive year in which the Nasdaq and S&P 500 in the US, the Nikkei in Japan, the FTSE 100 in the UK and the FTSE Eurobloc 300 have lost ground.

The experience is an all too familiar one for Japanese investors, since the market there peaked in the late 1980s.

But it is the first time there has been back-to-back annual declines in any of the other equity markets, since the very severe bear market of 1973/1974.

What odds on a hat trick in 2002? On the basis of the last 50 or 60 years experience, the odds would appear remote.

There has been no three-year period of successive declines in the US market since the second World War. One has to go back to the mid war years of 1939-1941 for the last occurrence.

Moreover, the experience of the 1973/1974 bear market is that all of these markets bounced back very significantly in 1975. In the US, the Nasdaq and the S&P 500 gained around 30 per cent while the UK market jumped by almost 140 per cent.

Those of a more cautious vein would argue that the post war experiences in the US and Europe are not the appropriate benchmarks. The downturn in global economies and equity markets over the last year or more is very different in nature than the recessions and bear markets of the 1970s, 1980s and 1990s.

It has its origin in the piercing of an asset bubble in the US almost two years ago.

In contrast, the recessions of the post war period followed deliberate policy actions by Central Banks, which had become concerned about the intensity of inflationary pressures that had built up in the system.

If we use the asset bubble experience as the benchmark, the two most relevant periods are the Japanese market since the late 1980s and the depression and stock market collapse of the 1930s in the US.

However, history rarely repeats itself. A more fruitful approach is to look at the current fundamentals in the markets and economies, regardless of how and how long it has taken us to get here.

When we do that, we find it difficult to see that the conditions are in place for a recovery in equity markets over the next 12 months. To use the jargon of the equity markets, we find it hard to see how either multiple expansion or earnings growth can deliver any worthwhile price appreciation in the coming year.

For the non-equity specialist, let us use a simple example. Take Company A that is making £1 million (€1.27 million) a year in after tax profits. The main valuation tool that markets use to establish a value for that company is the Price/Earnings ratio - the P/E.

It is the number of years' profits that a typical investor would be prepared to pay to buy the company.

A P/E of 10 would value the company at £10 million and it would take 10 years for the investor to get his money back if profits remained unchanged.

Of course, if the company were to grow its profits quickly the payback period would be much shorter. That is why markets pay higher P/Es for growth companies.

At present the US market is trading on a P/E of 25 times. That means a typical company is valued at 25 times after tax profits for the current year.

That is exceptionally high by historic standards and can only be justified by a belief that profits in most US companies are going to recover strongly over the next few years.

That is where we have the problem. If this is to occur, the US economy will need to recover strongly at some point in 2002 and continue growing strongly in 2003 and beyond.

We very much doubt if that will happen. Companies and individuals in the United States went on a spending spree in the second half of the 1990s and built up massive debts in the process and are still adding to those debts by continuing to spend more than their cash flow.

Until this financing deficit is breached, we think that any recovery that materialises in the US next year will be mild and it could be some years before it returns to what were seen in the past as "normal" growth rates. If that is so, the profit recovery will also be muted and markets will find it difficult to sustain a P/E of 25 times earnings.

If I were offered decent odds on the hat trick I would be inclined to have a flutter.

Robbie Kelleher is head of research and equity strategy at Davy Stockbrokers