SUMMARY It is remarkable that stock markets have held up so well in recent months, with so much to worry about. But don’t be complacent. It is what we call a “cartoon moment”, as we explain. On the one hand you mustn’t be surprised by falls around 20% from current levels, on the other hand those that are patient will be rewarded by the cheap buying opportunities.

With the range of problems which have unfolded over the last couple of months or so it is remarkable that the markets have not corrected more substantially. But don’t be fooled into thinking they won’t. It is what we call that “cartoon moment”, when the lead character has run out over the edge of a cliff, but continues to run in mid-air for some time – until they look down…

As mentioned last month, the downside for the FTSE 100 is 4800, with the possibility of 6200 in the very short term before investors begin to “look down”. The promised “comprehensive response” to the eurozone crisis was unveiled in recent days – it was comprehensive, but some way off a resolution. The odds of default in peripheral nations remain high, and the Germans are twitching about Greece again in recent days. The timing of such an event remains guesswork, but if a default is forced by markets, rather than being part of a planned, comprehensive, solution,stock market volatility could be extreme over short periods, as fears of a global  banking crisis (as in 2008) will come to the fore.

If UK interest rates start going up in the next few months, history suggests moderate market weakness for 6 months, more a sideways move than a marked correction. That would be a relatively benign outcome, though we should be cautious about assuming that history is a good guide as the developed economies continue their experiment in dealing with the sovereign debt crisis (which is not confined to the eurozone).

UK inflation? Last month we highlighted evolving deflationary tendencies. Among other things,if you have to pay more for petrol at the pumps you will have less money to spend on other things, which is a dampener for the economy and will tend to put downward pressure on prices – apart from those prices dictated by events elsewhere in the world, such as oil or food.

So we tittered over the last few days when there was a “surprise” fall in UK inflation. What was the surprise? Of course there are upward pressures on some prices – but there is also downward pressure on others.

The headlines around the US employment numbers last week were very positive, and it would be churlish not to acknowledge the improving trend. But this is a lagging, backward looking, indicator, and more coincident, current, indicators (such as consumer confidence) are not so encouraging. The US has had nearly two years of “recovery” built on extraordinary stimulus, yet employment is still much closer to the trough than the peak. It remains to be seen how markets will respond in June if the stimulus (quantitative easing, QE2) is not renewed by the US authorities.

Interestingly notes from Goldman Sachs and Morgan Stanley over the last fortnight are much more cautious than through 2010. These huge outfits really do move markets, and you can be sure they had already taken action (such as buying insurance against market falls) before they told you and us!

For the patient, keep some powder dry, or retain more than normal in lower risk funds, so that you can exploit the cheap buying opportunities which will emerge.