What was all the fuss about? That’s what stock markets seemed to be telling us. On Monday 17 October the FTSE 100 index rocketed back through 5500 before pulling back. Two weeks previously it was close to falling through 4800.

Indeed major stock market indices had registered cumulative gains of more than 10 per cent in less than two weeks.

Having fallen more than 20 per cent from July’s peak it was perhaps to be expected that traders would put a more positive spin on the conditions that had led to one of the worst quarters for equities in more than a decade. There were some more encouraging economic numbers from the US on jobs and retail sales and signs that eurozone policymakers were at last about to move beyond their, up to now, piecemeal approach to the debt crisis.

And what of this column’s long-held liking for gold? Having ascended rapidly to more than $1,900 it started a rapid descent and threatened to breach the $1,600 level – well before stock markets started perking up – as fearful investors sought to liquidate anything that couldn’t immediately be converted to cold, hard US dollars.

Gold has recovered a little of its glister – it’s now trading at a little under $1,700.
Where do these popular asset classes go from here? The views of panelists that contribute to our quarterly feature on asset allocation (see the November edition of Money Observer) mirror the dilemma facing active investors: namely is the glass half-full, or half-empty? And what are the alternatives to cash and government bonds, which, in all but a few instances (such as emerging market and Australian government bonds), are not yielding enough to compensate for inflation.

I suspect that the rally in shares should be regarded as one of relief, driven by the more positive recent news flow from Europe, and is unlikely to last.

As we enter the third-quarter corporate results season, investors will focus on guidance over prospects rather than whether targets have been hit. The omens are not good.

It’s said that markets dislike uncertainty but the underlying reason for this is that companies and consumers dislike it even more. Research from Nicholas Bloom, assistant professor of economics at Stanford University, shows that recessions have swiftly followed 16 recent periods of economic uncertainty.

He has studied 16 previous uncertainty shocks such as 9/11, the Cuban Missile Crisis and the assassination of JFK. ‘The only certain thing about these is they lead to deep, short-run recessions. When people are uncertain about the future, they wait and do nothing.’

In such a climate, firms hold back on hirings and capital expenditure, which in turn leads consumers to cut back, discouraging them from spending on big-ticket items. ‘The economy grinds to a halt while everyone waits,’ Bloom adds.

This time, says Bloom, the ‘explosive combination of eurozone debt contagion, vulnerable banking systems, and European and American political paralysis’ are the catalysts for the dreaded double-dip recession.

Despite some bright patches of economic news from the US, there are still signs of economic contraction there and in parts of core Europe, plus falling demand in emerging markets, while here in the UK the Bank of England was sufficiently concerned about the economic outlook to embark on a further £75 billion of quantitative easing.

All eyes will be focused on the eurozone summit on 22/23 October and then the G20 summit in Cannes on 3 November. Can policymakers comes up with a comprehensive plan to solve the eurozone crisis? Don’t hold your breath on that one.

Wise investors with a short- to medium-term outlook will have used the recent rally to reduce exposure to cyclically exposed shares, and to top up on quality corporate bonds, gold and commercial property.

Iain Stewart, manager of the admirably consistent Newton Real Return fund, agrees: ‘In this investment environment, we continue to believe that the best “each-way” opportunities remain in the corporate debt markets and in high-quality dividend-paying equities,’ explains Stewart. ‘In this latter group, we continue to emphasise strong business franchises in classically defensive sectors such as healthcare, telecoms and non-cyclical consumer areas such as food producers. We also see strong franchises with attractive characteristics in areas such as technology, and among agriculture-related stocks,’ he adds.

Stewart believes commodities and energy-related companies will be at the mercy of violent swings in sentiment about the future direction of the global economy, although the debasement of currencies that will likely result from the money-printing policies of central banks, especially in the US, means gold will provide a hedge against inflation.