A 75-basis-point cut in US interest rates on Monday 21 January propped up global equity markets just when they were taking a pasting. Last week’s additional 50-basis-point cut from US Federal Reserve chairman, Ben Bernanke, took US interest rates down to just 3.0%, their lowest level since May 2005. This helped American equities enjoy their best week in five years. Global markets, including the FTSE 100, joined the party.

But despite this final surge, the US stock market still fell by over 6% in January, its worst start to a year since 1990, when the first Iraq war began.

Investors now face a stark choice. Do they decide all of the bad news concerning the global economy and credit markets is in the price, that lower rates will save the day and equities are back off to the races? Or do they decide this is simply a bear market rally and an opportunity to take further evasive action?

Investors’ experiences of 1998 would suggest it is time to pile in. After Russia’s default on its overseas debts resulted in hedge fund Long Term Capital Management (LTCM) losing over $4 billion, the Fed, under the stewardship of Alan Greenspan, swooped to restore confidence in credit and equity markets. It cut US interest rates from 5.5% to 4.75% between September and December.

As a result, the Dow Jones swiftly regained all of the 19% it had lost when the crisis broke. Better still, it embarked upon the final leg of the 1999-2000 bull market run.

However, events in 2001-2003 preach a more cautionary approach. As signs that the bursting of the TMT bubble could hit the real economy began to emerge, the Fed, still under Greenspan, shoved through a pair of 50-basis-point cuts in US rates in January 2001.

But Greenspan was still cutting in June 2003, when US rates hit just 1%. Worse, although the NASDAQ had rallied on no fewer than four occasions by at least 20%, the index fell by 78% from its March 2000 high to its October 2002 low. The Dow Jones fell 36% from peak to trough at the same time.

If markets start to price in a rapid economic snapback and start a fresh bull run, shrewdies will remember the 1998 surge and 2001-2003’s rallies were spearheaded by the sectors that had got the markets going in the first place: technology, media and telecoms.

A repeat in 2008, would therefore suggest prior market darlings such as mining, resources, real estate and financials, which all performed so well from 2003 to mid-2007, will come back into vogue after their marked underperformance in the second half of last year.

But both the Dow Jones and the FTSE 100 saw last year’s interest rate cut-inspired rallies of September and November fizzle out. Both indices are lower now than they were when the Fed first cut last August, suggesting the markets are not convinced the rate cut elixir is reviving economic activity as fast as hoped.

If last week’s party simply proves to be another bear market rally, investors should seek new market leadership and then defensive stocks – which fell out of favour in January – will swiftly regain their safe haven status.

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