One year on from the bankruptcy of Lehman Brothers and we have seen global stock markets spend six months plummeting to a low in March 2009 and then six months rallying back again. Broadly the Dow and S&P are about 15% below the levels at which they stood on the Friday before Lehman went bankrupt on the weekend of September 15th 2008. We are still amidst the fog of war and nobody can quite work out whether stock markets are now too high following the impressive 50% rally since March or whether stock markets still have room to rally because an economic recovery may be starting (which then leads to an argument about whether the stock markets will fall again in 2010 should there be a double-dip recession).

If we track back to the week before Lehman went bankrupt then stock markets had already fallen 20% from their highs in October 2007 and they were discounting some type of a recession and had not yet begun to rally in anticipation of an economic recovery. The bankruptcy of Lehman changed the outlook so severely that markets sold off savagely to discount some type of 1930's-style depression (with leveraged players being forced to sell their investments which pushed share prices down even further). The governments and central banks stepped in with some determined spending of taxpayers' money and as the spectre of a depression has receded, stock markets have rallied back to their current levels (which are still below where they were on the eve of Lehman's bankruptcy).

So have stock markets rallied too far or do they still have room to rally some more?

Although markets never move anywhere in a straight line, it feels as if they still have room to rally further as the tentative economic recovery which has begun goes on to establish itself more firmly. Given that on the eve of Lehman's bankruptcy markets had not yet even begun to discount an economic recovery then in order to discount whatever shape of economic recovery we are about to experience, stock markets should logically be higher than where they were in early September 2008. The US reported positive economic growth for the quarter just ended (Q3 2009) and only time will tell whether the US economy goes on to report another quarter of growth in the final quarter of 2009.

So stock markets may well continue to climb the current Wall of Worry for the next couple of quarters and we can then start to consider the possibility of whether there will be a double-dip recession in 2010. Although central banks continue to print money and interest rates will stay rooted near zero for a long while yet, a sense of normality is starting to return to corporate life with takeover activity returning to stock markets (Kraft/Cadbury and Balfour Beatty/Parsons Brinckerhoff being two recent cross-border examples) and companies are finding it possible to raise equity capital (even though they are most unwilling to get deeper into debt).

Tentative it may be, but the recovery (which may well be long, slow & grinding) is only just beginning. The fog will clear from the battlefield over the next few quarters and investors will be able to assess things more clearly. The bad memories of the last year are still fresh in investors' minds but stock markets look forwards, not backwards.