Many equity funds are now two months past their maximum drawdown, which gives us a hint that stock markets could have already hit bottom. Also encouraging is the recent performance of the TED spread - which indicates a thawing in the credit freeze.

The keys to a sustainable rising trend in shares and other growth-oriented financial assets are the depth and duration of the global recession. A big driver of recovery will be the global policy response. Are there any signs it is working? Mortgage rates in the US have fallen over the last few months from around 6.5% to around 5%. We have seen an increase in the number of US homeowners refinancing their mortgages to lower fixed rates, which is normally a precursor to stronger consumer spending. There are some signs of stabilisation in global trade, as indicated by the Baltic Dry Freight index.

To be confident that economic recovery is on the way, a range of signposts needs to become positive. These include a slowing in the pace of US house price declines, an easing in bank lending standards and an improvement in credit growth. However, the fact that some indicators have turned slightly more positive is a good sign and consistent with our expectations for a global economic recovery from later this year and/or through 2010.

Most encouraging of all is the recent performance of the TED spread - which indicates a thawing in the credit freeze. The TED spread is the difference between the interest rates on interbank loans and short-term US government debt (risk free T-bills). The TED spread is an indicator of perceived credit risk and has a long-term average between 0.3% and 0.5%.

An increase in the TED spread is a sign the risk of default on interbank loans is increasing. Banks demand a higher rate of interest to lend to their peers. During 2007, the subprime mortgage crisis ballooned the TED spread to 1.5-2%. On October 10, 2008, the TED spread reached a high of 465 basis points (4.65%).

As the chart above shows, the TED spread has fallen back to around 1%. While still high by historical standards this is quite significant news and offers some comfort to those worrying about another banking calamity. Banks are starting to trust other banks again, which is surely the first step to economic normalisation.

Also there are signs that the government policy responses are helping. This provides some confidence that growth will start to stabilise. Even if this comes later, the stock market usually acts as a leading indicator - meaning shares may start a recovery path well before world economies do the same.

Not everything is rosy of course. Professor Nouriel Roubini, who predicted the financial crisis, recently said, "We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession." Roubini forecast economic growth in China will slow to less than 5%, and the US economy will expand 1% at most in 2010 as unemployment climbs to 9%. And plenty of analysts think investors should hold off buying equities till 2010, when they expect stocks will be much cheaper than now.

Another fear is further non-performing bank loans. Of particular concern are "Alt-A" mortgages, the next rank above subprime. The Economist recently said, "This market was trumpeted as a means of extending home ownership to those, such as the self-employed, with a reasonable credit standing but unsteady income. Its practitioners specialised in loans with scant documentation and exotica such as negative-amortisation mortgages, which allow borrowers to pay less than the accrued interest, with the difference added to the loan balance - that Alt-A has troubles comes as no surprise. Last summer, for instance, it helped to bring down IndyMac, a Californian bank. But the speed with which loans have soured in recent months, and the reaction of rating agencies, have been startling".

These clouds aside, when the efforts of governments start to have an effect, the market could be in for a pleasant surprise. According to Ned Davis Research, money-fund assets are at a historically high proportion of stock market value, and have risen at a 52% annual rate in the past 13 weeks. This money is waiting to pour back into the market and potentially fuel a strong recovery.

So overall our mood has shifted slightly towards a more positive, albeit still circumspect, outlook. This doesn't mean we urge clients to rush back into equities. We still recommend guarded and staged investments, as additions to a diversified portfolio. But it wouldn't surprise us if it turns out we already hit the bottom in the twilight months of 2008.