Investors in the UK stock market currently stand at something of a crossroads. From 2003 to last year the market powered ahead, with the FTSE 100 index of leading shares more than doubling in value. But since last summer the market has fallen back sharply. Many investors are wondering, and worrying, whether this is the beginning of a long-term bear market?

The bears have several strong arguments on their side. First, the stock market has already registered a fall of 20 per cent from last summer's peak, thus fulfilling the standard definition of what constitutes a bear market. Secondly, if the two main drivers of market sentiment are greed and fear, then fear clearly has the upper hand right now. Share prices have been pushed lower as investors grow more concerned about the damaging impact of the credit crunch.

On top of this, the general economic outlook is worsening. Inflation has risen to more than 4 per cent, house prices are falling at an annual rate of more than 10 per cent and growth forecasts have been pared back so severely that there is now a serious possibility that the UK will go into recession. None of this will be good for share prices.

But if that sounds pessimistic, there's worse to come. The massive write-offs for bad debts that the main UK banks have been making relate primarily to their exposure to the US sub-prime market. The bulk of expected defaults on UK mortgages have not yet worked their way through the system. These, coupled with falling property prices, could deal another heavy blow to the profitability of banks and all the other sectors linked to the housing market. That includes builders, estate agents and DIY stores. It will also have an adverse impact on consumer confidence.

The real hardcore pessimists argue that we are already nine years into a long-term bear market. They point out that the FTSE 100 stands about 1,400 points below its peak of 6,930 reached in December 1999. They regard the share boom from 2003 to last year as an upward correction in a long-term downward slide and do not expect the stock market to scale its previous peak for many years to come.

The gloom merchants can point to previous long periods in which stock markets have either fallen or gone nowhere, such as the US market between 1966 and 1982, or Japan from 1990 to the present day.

However, a long-term perspective can prompt a very different conclusion. The two most savage postwar bear markets in the UK were those in 1973-74, when the market fell by 70 per cent, and in 2000-03, when the market lost 50 per cent of its value. Neither lasted very long and the only other significant correction of the past 30 years was the very sharp, but very short, fall in the autumn of 1987. In other words, when we do get a bear market, it is not usually a long-term one.

There were 13 years between the end of the 1973-74 bear market and the October collapse of 1987, and another 13 before the arrival of the next significant bear market in 2000. Far from being the home of long-term stock market downturns, the UK seems more inclined to play host to long-term bull markets.

There are other reasons to be positive. The price-earnings ratio - a key measure of valuation - for UK shares currently stands at a little less than ten, which is the cheapest at which they have traded for 20 years.

UK shares are now on cheaper valuations than in the US, Japan, Europe or emerging markets. By any traditional measure of valuation, UK shares are a screaming buy. In some of the more bombed-out sectors, such as banks and builders, where shares have fallen by much more than the market average of 20 per cent, valuations are cheaper still.

Dividend yields on UK shares have also risen to more than 4 per cent for the first time since the 1990s. They are now very close to matching the yield on UK government bonds, or gilts. The last time that this crossover point was reached was March 2003, which marked the end of the last bear market and the start of a four-year rise in share prices. Clearly, valuations could look less attractive if a large number of companies cut their dividends - and some have - but most remain reluctant to do so. Equally, fear could continue to deter investors from plunging back into the stock market just yet.

I expect that there will be further scares and nasty surprises, and the market could well fall further before it recovers, but I think that UK shares offer good long-term value at current levels. Investors who embark on a steady programme of buying over the coming months are highly likely to be sitting on handsome profits in ten years' time.

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