While U.S. markets are likely to be volatile in the months ahead, much of the selloff may now be over, says National Bank Financial. But it is more cautious about the Canadian market.

In a research note, NBF reports that U.S. equity indexes are close to bear market territory, usually defined as a 20% retreat. “The 18.6% pullback of the S&P 500 from its October 9 peak to the recent trough (March 10) is not far from the average decline of 20%-25% seen over the last five U.S. recessions,” it observes.

The firm notes that the U.S. Federal Reserve Board has gone to great lengths to pump liquidity into the system, in an effort to normalize the credit markets. “In conjunction with recently enacted fiscal stimulus, these developments are likely to keep the U.S. recession moderate,” it predicts, adding, “Since the stock market tends to bottom many months before the economy does, these developments leave us thinking that, although volatility is likely to prevail for some time, much of the correction may be behind us. Our year-end target for the S&P 500 is unchanged at 1,400.”

In Canada, the S&P/TSX is only down 8.8% since the U.S. market peak of October, which NBF points out is much less than its average 23% decline of the previous five U.S. recessions. “Given the significant doubts we have expressed about the theory of U.S.-Asia decoupling and our expectation that regulators will raise margin requirements in commodities markets in order to reduce financial demand from speculators and noncommercial players, we remain very cautious on the Canadian market. Our year-end target for the S&P/TSX is unchanged at 12,800,” the firm says.

It also expresses continued caution on the financial sector. “Although our comfort level has increased over the last few weeks in step with policymakers’ bold moves to lubricate the banking system, we are not ready yet to overweight financial stocks. The U.S. housing sector has not yet stabilized, suggesting more writeoffs ahead. With the market unstable (the financial system more opaque than in the past) and real rates negative, we think bullion will continue to act as a haven,” it says.

“Since we expect some spillover effect from a U.S. consumer­led recession on Asian economic growth, we think physical demand for commodities is poised to fade and remain cautious on energy and materials stocks. We prefer defensive sectors such as consumer staples and selected consumer discretionary industries (cable and media in particular),” it concludes.