The recent rapidly changing conditions in the global financial markets serve to illustrate that global economic and political conditions remain extremely fluid and uncertain.

In the immediate aftermath of the latest round of interest rate cuts from central banks, financial analysts and commentators were falling over one another in predicting further rate cuts in coming months. Universal opinion seemed to be that a global economic recession was almost upon us and central bankers would be forced to enter into another round of interest rate cuts.

The past week to 10 days has witnessed a sudden shift in market sentiment away from universal pessimism towards a more benign assessment of future economic developments. It is too early to conclude that a decisive turning point has been reached, but a significant cohort of analysts are taking this view based on a narrow range of factors.

Suddenly, it is being argued that the Federal Reserve may not cut US interest rates any further and that the next move in rates will be upwards if US economic recovery takes hold in the spring of next year.

Support for this more optimistic scenario seems to emanate from two key sources.

Firstly, the most recent data on US consumer spending has shown that October was much stronger than originally forecast. Some of this strength was due to a jump in auto sales, as car dealers tempted consumers with zero interest rate financing deals.

However, excluding cars, US consumer spending proved resilient and, if this resilience is sustained, it will certainly stabilise the US economy. The sudden turn in the war in Afghanistan has served to solidify this more optimistic assessment of US consumer confidence.

A second factor underpinning this more positive tone is a general recovery in share prices so far this quarter. From October 1st to date, there has been an impressive recovery in share prices and most stock markets are now at or above their respective levels immediately prior to September 11th. The S&P500 has risen by just under 10 per cent, whilst the much more volatile Nasdaq has risen by more than one-quarter.

This recovery in share prices has not been confined to the US, as can be seen from the accompanying table. Indices in Europe, Britain and Japan have experienced impressive recoveries in recent months. The Irish market has also risen, although gains have been more modest, reflecting the fact that Irish share prices had not fallen as far earlier this year.

Another development that has served to bolster confidence is the sharp decline in the oil price. From a recent peak price of more than $30 per barrel, oil prices have fallen to below $20 per barrel. OPEC is frantically trying to cobble together a deal with the main non-OPEC oil producers, which include Mexico and Russia, to limit production in order to stabilise prices. Agreement will be very difficult to achieve and, therefore, falling global demand for oil should ensure lower prices for the foreseeable future.

This has produced some respite to the beleaguered airline sector, where fuel prices are a substantial portion of overall costs. More generally, lower oil prices feed through rapidly to consumer prices, thus acting to depress reported inflation even further.

In effect, a lower world oil price has the same effect on the economy as a tax cut. Real personal incomes are boosted, helping to fund stronger consumer spending.

For investors, this recent recovery in market sentiment is unquestionably good news. However, there are still grounds for caution, particularly if one takes a medium-term view.

There remain substantial financial imbalances across the US economy that will take years to resolve. The personal savings rate is extremely low and needs to rise while, at the same time, the corporate sector is still retrenching. Sharp declines in corporate profitability mean that companies need time to cut costs and rebuild their balance sheets.

In addition, share prices in the US are still very high when set against the much lower level of profits now being generated by corporate America.

Therefore, it is unlikely that this current phase of stock market optimism will translate into a sustained bull market that lifts all boats.

A rigorous approach to stock selection and careful timing of new investments will continue to be critical for successful investing in the current stock market environment.