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In my previous columns, I have been distinctly cautious, arguing investors should hold a reasonable degree of cash in their portfolios. That caution has paid off over the last 18 months. Now it is time to start thinking about putting that cash to work.

True, the economy is facing an awful lot of problems, from a collapse in the housing market and a gaping hole in the government's budget to an over-dependence on the financial sector. But value in the stock market is not just about whether the economic outlook is good or bad. It is about whether that news is fully reflected in the price.

We are now starting to see share prices that reflect a sizeable degree of bad news. At the time of writing, both the FTSE100 and the All-Share indices were trading on price/earnings ratios of 10.5-11, within sight of the single-digit level that historically proved a good buying opportunity.

Another classic signal is the cross-over of the dividend yield on the All-Share and the 10-year gilt yield. The last time shares yielded more than government bonds was March 2003, which proved to be the start of a four-year rally. Before that, you have to go back to the late 1950s before the cult of the equity.

At the moment, the All-Share is yielding 4.3 per cent and the 10-year gilt 5 per cent. If the stock market were to fall another 10 per cent, gilt yields would probably drop in line and we would be just about there. Of course, it is natural in the circumstances to worry that profits will fall and dividends will be cut. That is why dividends are yielding more than 4 per cent in the first place. But the key is to distinguish between the short and the long term.

Over the long run, dividends tend to rise, at least keeping pace with inflation – the cash income on the All-Share has almost doubled since the market bottom in March 2003. Gilt yields do not change. Markets, therefore, are making very pessimistic assumptions when equity and gilt yields are close together.

There will be lots of bad news in the second half. The banks will be faced with more bad debts and, after the dismal reception given to the HBoS and Bradford & Bingley rights issues, their shares will be sitting in unwilling hands. As a nation, we are “over-shopped”, and as consumer spending inevitably slows, the weak players will be forced out. Construction companies will go to the wall.

Worse still, there is not that much the government can do about it. There is no scope to cut taxes and the Bank of England cannot reduce interest rates while inflation is so far above target.

Still there have been some hopeful signs. Oil has come off its peak of $147. If it heads even lower, towards double digits, that would both relive the pressure on the consumer and reduce headline inflation. Santander was willing to bid for Alliance & Leicester and the latest US bank results have been better than feared.

Maybe 5000 doesn't turn out to be the absolute bottom for Footsie in this cycle, but if shares dip anywhere significantly below that level, investors should be thinking about putting their cash to work.

Philip Coggan is Buttonwood columnist for The Economist