Investor: An insider's guide to the market The third quarter finished on a high note for investors as optimism was bolstered by a growing conviction that the US economy will enjoy a soft landing next year.

The dangers to the global economy posed by the retrenchment in the US housing market and the consequent potential negative impact on US consumers were brushed aside as investors focused on the positives.

A key positive is a lowering of inflationary expectations due to the combination of lower oil prices and slower US economic growth. Such lower inflationary expectations have lent greater credence to the view that there will be no further increases in US short-term interest rates for this cycle. In fact, the US bond market has already priced in cuts in US interest rates to occur sometime in 2007. The yield on 10-year US treasuries has declined from 5.2 per cent in early July to 4.6 per cent by end-September.

Such a fall in bond yields is very positive for equity markets as it makes equity valuations more attractive relative to bonds.

Of course, a potential downside to slower economic growth is a slowdown in the rate of growth in corporate profits. So far, there is little sign of such a slowdown and analysts are optimistic that corporations can continue to grow profits even through a moderate economic slowdown.

Sustained double-digit year-on-year percentage increases in corporate profits have been a feature of the US market for three years. A slowdown in this rate of growth is expected, although the risk of an actual decline in profits is considered to be remote. This optimistic scenario is predicated on the view that Europe and the Far East can continue to grow in the face of a US slowdown. The euro zone seems to have finally entered a period of self-sustaining growth that is unlikely to be derailed by European Central Bank interest rate rises. Japan has also turned the corner and an important symbol of confidence in the future was the Bank of Japan's first move away from the zero interest rate policy.

The emergence of China and India as significant economic players in a global context adds another dimension to the assessment of global economic prospects. These economies seem well-placed to continue to grow rapidly over the medium term, irrespective of prospects for the developed world.

The growing confidence in this benign view of global economic prospects lies behind the remarkable recovery in global equities during the third quarter. The FTSE All World index hit the year's low point in mid-June, but has since risen by more than 11 per cent. With the exception of Japan, most world equity indices are now well up for the first three-quarters of 2006. In local currency terms, the S&P 500 has risen 7 per cent, the FTSE E300 is up by 9.5 per cent and the FTSE 100 has risen by 6.1 per cent. After a very strong third quarter, the Iseq Overall index is up by an impressive 11.7 per cent.

The recovery in world stock markets combined with several very strong earnings reports created the conditions for Iseq out-performance over the third quarter. In capital terms, the Iseq rose by 9.5 per cent during the quarter led by some very strong rises in several of the market's mid-capitalisation stocks.

C&C Group was yet again the outstanding performer with a rise of 58 per cent, as its Magners cider continued to go from strength to strength in Britain. C&C's shares have now almost doubled so far in 2006.

Kingspan was another company to deliver strong financial results and it duly rose by 19 per cent in the third quarter to leave the shares up by more than 50 per cent year-to-date.

Ryanair is a clear beneficiary of lower oil prices and the stock rose by 19 per cent over the quarter, although this still only leaves it 2 per cent up on the year.

The two big banks did a little better than the overall market, with AIB up by 12 per cent and Bank of Ireland up by 11 per cent.

Anglo Irish Bank and Irish Life & Permanent didn't do quite as well, although they each managed to rise by 6 per cent.

Laggards during the quarter included Independent News & Media and Irish Continental Group, down by 11 per cent and 10 per cent respectively.

The fourth quarter is unlikely to produce a repeat of the third quarter in terms of absolute return given the recovery element to the third quarter's performance. Nevertheless, the positive factors that drove returns in the last quarter should underpin further significant advances in share prices during the final quarter.