The six biggest bear markets in the Dow Jones industrial average in the 100 years before the October 2007-March 2009 decline were 1973-74, 1937-42, 1929-32, 1919-21, 1909-14 and 1906-07. The 1929-32 fall was by far the largest at 89% while the other five ranged between 45% and 52%. The 2007-09 bear involved a 54% slump. (For reference, the Dow decline over 2000-03 was "only" 38%.)

The chart compares the 2007-09 decline and subsequent recovery with the four peacetime bears, i.e. excluding the 1909-14 and 1937-42 falls, which were influenced in their later stages by the world wars. The peak levels of the Dow were rebased to 100 and the earlier cycles aligned with the October 2007 top.

At the March 2009 low the Dow was much weaker than at the equivalent stage of the 1906-07, 1919-21 and 1973-74 bear markets and was tracking the 1929-32 decline. The recent recovery, however, has moved the index above the four prior cycles.

The 1906-07, 1919-21 and 1973-74 bears were comparable in terms of magnitude and duration and the subsequent recoveries were also broadly similar. A repeat performance in the current cycle would involve the Dow rising to within 5-15% of its October 2007 peak by the end of 2010, implying an index level of 12000-13500.

Some pessimistic commentators draw a comparison between the recent recovery and the failed rally of November 1929-April 1930 – see the rise in the bottom, black line between late 2007 and mid 2008. The Dow climbed 48% versus a recent trough-to-peak increase of 50% before embarking on a further devastating decline.

Even ignoring policy differences, the comparison is dubious because the 1929-30 failed rally began only two months into the bear market and three months into the recession, before the full consequences of the bursting of the prior credit bubble were apparent. The March 2009 bottom, by contrast, followed a long economic and market decline and was characterised by very weak investor expectations.

Recent posts have argued that the consensus is misreading the monetary data and underestimating the degree of stimulus to asset markets and the wider economy from the current policy stance. News this week supports the view that economic performance and prospects are improving significantly.

First, a monthly GDP estimate based on services and industrial output data rose by 0.1% in July after a 0.3% June gain, to stand 0.2% above its second-quarter average – see first chart. With business surveys suggesting a further recovery and upward revisions possible, GDP may have grown by as much as 0.5% in the current quarter (preliminary figures will be released on 23 October).

Secondly, the EU Commission measure of consumer confidence vaulted higher in September and is now only marginally below its long-term average. UK confidence has recovered much more strongly than in other major economies – second chart. In addition to becoming more optimistic about the economy and their own finances, households are signalling reduced concern about labour market weakness, suggesting that unemployment could peak earlier than many expect.

Thirdly, the number of upgrades to company earnings forecasts by equity analysts is exceeding downgrades by a widening margin, which is usually a sign of rising economic momentum. The "revisions ratio" (i.e. net upgrades divided by the total number of earnings estimates) correlates with business surveys and suggests further improvement in forthcoming purchasing managers' indices – third chart.

UK broad money growth remained sluggish in August but narrow money posted another strong gain, corporate liquidity continues to improve and mortgage lending is recovering. These developments suggest that the broad money numbers understate monetary support for the economy, i.e. the velocity of circulation may now be rising.

1. M4 excluding "intermediate other financial corporations" rose by 0.2% in August, down from 0.4% in July, with the decline probably due to smaller Bank of England gilt purchases (£12 billion versus £23 billion). Incorporating downward revisions to earlier numbers, broad money grew by 4.0% annualised in the first eight months of the year.

2. By contrast, "non-interest-bearing M1" – comprising cash and interest-free current accounts – rose by 1.8% in August, giving a year-to-date annualised gain of 46%. As discussed in recent posts, narrow money strength relative to broad money is often an indicator of a pick-up in velocity. (Note: non-interest-bearing M1 includes only current accounts with no advertised interest rate, i.e. it is not distorted by the rate on some accounts being cut to zero.)

3. Private non-financial corporations' cash and deposits rose last month, with a small fall in their M4 holdings offset by a rise in foreign currency assets. With bank borrowing little changed, a foreign-currency-inclusive measure of the liquidity ratio rose further to its highest level since October 2007 – see first chart.

4. M4 lending excluding intermediate OFCs slumped by 0.5% last month but this was entirely due to financial corporations, whose borrowings are often volatile. Lending to households and private non-financial corporations rose by 0.1%.

5. Net mortgage lending recovered to £1.0 billion in August while the value of mortgage approvals for house purchase reached its highest level since April 2008. The number of approvals, however, was marginally lower than in July, indicating that the lending pick-up is weighted towards higher-value homes – second chart. Net lending remains on course to recover to about £2 billion over coming months – see earlier post.

While the primary cause appears to be relatively loose UK monetary conditions, sterling's recent slide was given an additional fillip last week by comments by Bank of England Governor Mervyn King again welcoming a weaker pound. This extends a previously-documented pattern of the Governor's public utterances coinciding with currency depreciation.

Since August 2008, Mr King has presented at five Inflation Report press conferences and given four set-piece speeches. A strategy of shorting the effective index at the close before each appearance and covering the position 24 hours later would have been profitable on all nine occasions. Assuming no gearing, the strategy would have returned a cumulative 11.9% over nine trading days – an annualised gain of more than 2000%.

The benefits of sterling depreciation were questioned in a post last December, which suggested that the inflation cost would be greater than assumed by the MPC and the consensus; this appears to have been borne out by disappointing CPI outturns this year. Official remarks are unlikely to have any lasting effect on currency movements but it is nonetheless surprising that Mr King continues to sing the praises of a slumping pound.

Further evidence of a fall in the demand to hold money is provided by Investment Management Association figures showing £2.2 billion of net retail sales of unit trusts and OEICs in August, a record for the month – see chart. Sales remain on course to reach £24 billion in 2009, above the 2000 peak of £18 billion and up from just £4 billion last year.

As previously explained, if this year's increase is a reflection of reduced money demand, broad money numbers will understate the growth in cash available to support a recovery in the economy and markets by about £20 billion, equivalent to 1.3% of M4 excluding "intermediate other financial corporations".

Sales of bond and equity funds were similar in August, at £742 million and £696 million respectively, while property inflows continued their recent revival, reaching £129 million – the highest since June 2007.