Is this the start of the Bull Run?

It does not seem that long ago, when the global financial systems was on the brink of collapse of a biblical proportion. It now appears that the joint efforts of central banks and Governments across the world have averted the complete systemic collapse.

This has prompted a generally more optimistic outlook by investors and economist on the future of the global economy. This has helped the FTSE 100, to achieve growth of 15%, in just one month and this begs the question; is this bull market returning or is it just a bear market rally?

Japan, Germany and France have all successfully returned to economic growth, to the surprise of many economists. All three countries have been experiencing abnormally deep recession, since these countries are massive exporters on the global market. When world trade start to decline in late 2008, it became apparent that net exports would take the brunt of the fall in global demand. With these major economies lifting themselves out the current recession, this is adding optimism to investors that world trade can recover and that other developed nations would achieve growth in the 3rd quarter.

The world's biggest economy is starting to show tentative signs of economic recovery, as the big government programs start to take effect. The most notable of these policies is the recent "cash for clunkers" program. In essence consumers are given credits of either $3,500 or $4,500 for turning in certain gas-guzzling, environmentally unfriendly vehicles and buying new, more fuel-efficient ones. This program was so much of success that the US government had to extend the funds available from one billion to three billion, to cover the cost of the rebate. Overall there has been over 700,000 cars sold, which has handed a much-needed lifeline to the American car industry. This combined with the other American stimulus packages should help the economy achieve growth in the 3rd quarter and signal the start of the Bull Run.

Historically bull markets nearly always start a midst a barrage of dire economic news, at the point when investor confidence is rock bottom. An important indicator is the Bloomberg survey of experienced investors, which in essence is a survey of approximately 300 top investors in attempt to gauge investor sentiment. When the market reached its lows in March, the survey illustrated a severe lack of confidence and the average investor was holding approximately 45% of their funds in cash; which is a record high. However, at the start of August the amount of cash held by experience investors was just 25%, which represents a massive increase in optimism.

The general public has also mirrored this optimism, as show with the rise in sales of investment funds. The Investment Management Association says net retail sales in June sky rocketed to £2.5bn, from £128m in the same month last year, while investment ISA's sales hit a six-year high.This private and investor confidence will give the market the additional influx of cash to help stimulate the market and make a Bull Run more sustainable.

On the other-side of the argument, the pessimists are still keen to point out the fundamental problems that still remain in the global economy. One of the main concerns is the unprecedented amount of economic stimulus released by the governments and central banks. This economic stimulus packages is creating two major concerns, first concern being inflationary pressure in the long term. The low interest rates and asset purchasing programs used by the governments is essentially increasing the supply of money and in most cases reducing the value of the currency. Therefore, it is reasonable to assume that all this additional money in the system will cause inflationary pressure.

The global economy is in essence on government life support, the massive monetary and fiscal stimulus is keeping the economies of the world "alive and kicking". However, these emergency measures cannot continue forever and when the government start to remove aid from these economies, this is where problems may occur. Interest rates inevitable will begin to rise again and governments will adjust the fiscal spending to pre-credit crunch levels. The combination of these factors will cause economic drag on company profits and employment. This careful balancing act is one of the most unknown factors facing the current economic climate.

The recent rally in the stock market could be the start of the Bull Run or a bear market rally. Only time will tell; the evidence is there to back either side of the argument. We would recommend a balanced cautious and diversified approach to investing; after all, the tortoise did beat the hare.