Three months ago, before the eurozone crisis hit the financial markets, I warned that stock markets were being ‘irrational’ and that ‘shares are priced for a far more rosy future than is likely’. I advised that you ‘take a dispassionate look at your exposure to risky assets and consider cutting them back’.

Back then the FTSE 100 index had surpassed the 5800 level. By early July it had given up 1,000 points. I hope you found those comments, which I reiterated and expanded on a month later, of some use in dodging the dip. In common with other leading equity markets, the index staged a very strong rally back towards 5300 by mid July, but I think this was nothing more than the proverbial dead cat bounce.

The question that investors seek an answer to now, however, is whether we are about to embark on a second downward leg that could see the FTSE 100 fall to 4500 or below. I suspect that the best we can hope for is that the markets will stay calm throughout late July and August.

The July rally was driven by a strong start to the first half of the corporate reporting season in the all-important US. Bullish traders are latching on to this short-term microeconomic strength and ignoring the poor macroeconomic backdrop. The bigger picture shows we should continue to be more fearful rather than cheerful.

Let’s take the obvious reasons first. In the UK the Treasury acknowledges that the brutal measures outlined in the emergency Budget to slash the fiscal deficit puts our nascent economic recovery at risk if the private sector is not able to take up the slack, chiefly though higher exports.

We have seen signs that the private sector is weaker than the Treasury believes. In spite of the competitive level of sterling, exports have barely risen over the year and we continue to import more than we export. The latest figures show the UK’s trade deficit at its widest since July 2008. Continental Europe, the UK’s biggest market, is in a parlous state and is in no mood to increase spending.

Investors are divided on the potential outcomes to the eurozone sovereign debt crisis. The so-called stress tests of eurozone banks by the European Central Bank are not stressful enough – something that might become more apparent when the results are published after this edition goes to press.

In the US, positive economic effects of the huge fiscal stimulus enacted in early 2009 are wearing off. House prices have fallen, retail sales are down and consumers aren’t confident.

China, which is so important to keeping the global recovery on track, is not exactly going off the rails, but the economic locomotive is certainly slowing down.

Overriding all of this, the International Monetary Fund has warned that global growth might not be as strong as it first forecast – something many of us suspected all along.

So much for the obvious. You could argue that investors have digested this negative news flow and can now move on to the broad, sunlit uplands of economic stability and rising financial markets. So what is ‘the smart money’ doing?

In the first week of July global fund managers were pouring tens of billions of dollars into cash. Research group EPFR Global reported that these (mainly US-based) funds were holding up to 40 per cent of their portfolios in money-market funds and that inflows were at their highest since January 2009. A Reuters asset allocation poll also found that UK funds had their highest average cash weighting since the aftermath of Lehman Brothers’ collapse. Hedge funds have been taking big positions in gold as odds on the dreaded double dip shorten. Gold is traditionally viewed as a hedge against inflation. But it is also a safe haven in times of crisis.

Hugh Hendry, a hedge fund manager with a reputation for making serious money from his bearish economic views, foresees an economic slump in China. He has constructed a ‘short credit’ portfolio of 20 industrial businesses, with ‘the dubious distinction of suffering from gigantic financial leverage and Asian/commodity over-dependence’.

Clients of Eclectica Asset Management were told by Hendry: ‘Without a doubt, some of these businesses will not survive. Others will have to be radically overhauled and restructured, and we will make money.’

What of strategies that are more easily accessed by private investors? Trevor Greetham, Fidelity International’s director of asset allocation, has cut back exposure to equities in the multi-asset strategic funds he runs. ‘I have trimmed down the large overweight equity positions in our multi-asset funds, with a view to buying during dips later in the year,’ he says. ‘Stocks tend to underperform bonds until lead indicators trough, and this is unlikely to happen before late 2010 or early 2011.’

There will be a time to pick up stock market bargains, but that time is not yet upon us.