The first was the Federal Reserve's rescue of Long Term Capital Management. From the start, on 17 July, the bear market was more an internalised response to the financial contagion spreading from the developing world than anything else. In this respect it was quite unlike most previous corrections, which tend to be caused by a build up of inflationary pressures, an increase in interest rates, and a consequent reduction in credit and liquidity.
The collapse of LTCM threatened to turn this contagion into financial armageddon. Imagine what might have happened. The enforced liquidation of a $200bn portfolio would have moved the market dramatically further against the herd who had been following similar trading strategies. There would have been multiple bankruptcies and an undreamt of erosion of capital throughout the Western banking system.
Our own prediction of 4,200 for the index might have looked optimistic in the extreme.
The second piece of life support also came from the US Federal Reserve - a second cut in US interest rates. Although only a quarter point, the unscheduled nature of the cut nonetheless sent an important message to markets. Alan Greenspan and other policy makers were not entirely asleep at the wheel after all, but were still capable of decisive action.
Even so, the subsequent bounce in the market has taken even the most bullish commentators by surprise. The FTSE100 index has recovered more than half its fall and as things stand, it's up 6 per cent on the year as a whole. Recovery in the FTSE mid cap has been more cautious, while the small cap index remains way below both its peak and its starting level for the year. But, on average, even these companies have shown a considerable recovery since the market bottomed.
The bounce in the US has been more spectacular still, with the Standard & Poors composite now back to within spitting distance of its peak. As far as Western stock markets are concerned, then, it is almost as if the crisis of the late summer never happened. We all know that markets are prone to exaggeration, to bouts of panic both on the up and downside.
Despite the sophistication of modern analysis and trading systems, markets remain the creature of primeval psychologies - fear and greed. Traders move in herds, perhaps more so now that so many of them are not genuine investors than ever before, panicking the market down one month only to drive it up the next for fear of missing their turn.
This in itself is a good reason for remaining suspicious of the present recovery. Plainly we are now in much calmer waters than we have been. And it no longer appears likely that a big player in financial markets is about to go bust, causing a fresh bout of panic. On the other hand, the economic fundamentals don't seem to have changed very much.
The UK economy is slowing rapidly; the US and the rest of Europe cannot be too far behind.
As yesterday's regional trends survey shows, the recession in manufacturing is about to become official. A full recession across the whole economy still seems unlikely, but it would be unwise to bet that way. For investors, caution must remain the order of the day. That is not to say that all the bargains have gone, but the emphasis, as ever, has to be on stock selection for the long term.Reuse content