Bear Market Rally

Investors need to remember one thing - that bear market rallies are extremely sharp, but they are still bear market rallies. This bear market in equities has been caused by massive global deleveraging.

These type of deleveraging episodes are generally characterized by rising savings, low levels of investment and weak consumption. Economic growth tends to be both below average and fitful. It is common for initial economic recoveries to be followed by subsequent weakness - a so-called W-shaped recovery.

It is always useful to draw upon history as a guide. Experience of the Great Depression reveals that these types of economic downturns can last a long time. Equity markets during such a period can rebound sharply but ephemerally.

In a comparison to the Great Depression, the good news is that we are not at the start of the crisis, but several years into it. The analogue of the 1929 Wall Street crash is not the 2007 credit crunch, but the bursting of the New Economy bubble in 2000.

The difference between the years after 1929 and the years after 2000 is that policy mistakes were almost exact opposites. The Federal Reserve's policies led to a boom in asset prices, extended unsustainable credit levels and induced further growth of the fundamentally flawed financial infrastructure.

In 1937-38, stock markets fell again as markets and business leaders came to doubt the durability of the business foundations of the partial recovery from the Great Depression. In 2007-08, markets and business leaders came to doubt the durability of the financial foundations that had supported consumption and asset price growth after the New Economy fiasco.

Based on history, this bear market probably still has to run before it is finally over.