Investor: There are signs the low point reached by equity markets in early October may represent the bottom of the slump.

The recent rally in global stock markets has led to a lively debate amongst market analysts and commentators as to whether this long bear market may be bottoming out. The recent bounce has been very sharp and has occurred over a very short space of time. For example, over the four trading days of October 10th, 11th, 14th and 15th the Dow Jones Industrial Average rose by 13 per cent. However, it usually takes a stock market a long time to regain lost ground.

An extreme but by no means unique example is the Dow that stood at 1,000 in 1966 and fell to its nadir in the bear market of 1973/74. It took another 18 years, until 1982, for this index to regain the 1,000 level. Precedent thus suggests that it may be several years or more before equity markets regain the peaks hit in early 2000.

However, signs that share prices have stopped falling would be enough to stabilise current investor sentiment. In this regard, there are some signs that the low point reached by equity markets in early October may represent the low for some time.

As the accompanying table shows, so far this quarter virtually all markets have regained some lost ground.

In the US, the Dow and S&P 500 have each risen by approximately 9 per cent since end-September.

The recovery in European markets has been a little greater with the EuroStoxx 50 index up 15 per cent and the FTSE 100 up 11 per cent. The ISEQ has lagged a little with the overall index up by just over 5 per cent.

In more normal circumstances these would rank as very large gains but in the context of previous declines they are not quite so impressive. Even after the recent recovery, the S&P 500 is still more than 20 per cent down so far this year. The EuroStoxx 50 is one-third lower than at the beginning of the year, whilst the ISEQ is down by just under 30 per cent.

Viewed in this context the recent share price gains would seem to be mainly a recovery from a very oversold position. In other words, at the lows of early October investors had probably priced in "too much" bad news. Therefore, share prices were primed to respond to any morsels of good news that emerged.

Indeed, there have been some quite positive developments in recent weeks. Firstly, many corporate financial reports proved to be much better than previously feared. Global bell-weather companies such as IBM and Nokia reported financial results that were better than analysts' expectations.

Secondly, there are signs that merger and acquisition activity may be about to become more prevalent. In the UK, media groups Carlton and Granada announced a merger. Bank of Ireland attempted to open merger discussions with Abbey National. In addition, many companies continue to buy back their own shares in the marketplace. This suggests that many corporations are taking the view that current share prices are low and offer value.

This tentative resurgence in investor confidence has been tempered by continued mixed economic reports concerning the US and European economies, not to mention the difficult environment facing many Far Eastern economies.

Indicators of US consumer confidence continue to weaken, whilst there is now convincing evidence of quite a sharp slowdown in Europe. Many European governments will have major difficulty in holding to the fiscal deficit terms of the Stability and Growth Pact.

With conflicting statements coming from the European Commission and finance ministers, a relaxation in the implementation of rules regarding fiscal policy now seems inevitable.

A strong and sustained period of co-ordinated global economic growth still seems to be some years away, which when combined with uncertainty regarding Iraq, leads to the conclusion that the economic and financial background is likely to be volatile for the foreseeable future.

Therefore, even if share prices now could justifiably rise on valuation grounds, a sustained bull market will probably have to await the emergence of a more favourable global economic and political environment.