While 2002 seems destined to close as another bad year for stock markets, TD Bank says that 2003 should be better.

“Barring a holiday miracle in the days ahead, 2002 will represent the third straight year of losses for North America’s major stock-market indices — the longest continuous down stretch since the end of the Second World War,” says TD Bank. As a result, the 10-year average annual gain now stands at 7%-7.5% per year.

“On a brighter note, there appears to be a growing sense that 2003 will return tides of joy to stock-market investors, who truly need a boost,” it says. TD notes that excesses of the 1990s bubble have fallen by the wayside, and the rash of corporate accounting scandals have disappeared from the headlines.

TD says a recent Reuters poll predicts a 15% gain for the S&P 500 next year. “We don’t quibble with the view that equity investors are likely to end up on the winning end next year. But, such a jump in overall equity values appears may be a tall order, especially with the U.S. economy still stuck in its recent soft spot.”

TD warns that the U.S. economy has not yet shown signs of strong recovery. “Our real GDP growth forecast of a sub-par 2.5% in the first half of 2003 indicates that corporate profit recovery will be held to 7% on a fourth-quarter-over-fourth quarter basis in 2003. While this would be a respectable rate, our profit forecast suggests that equity markets will be hard-pressured to achieve the full 15% consensus gain.”

TD says bond markets would take a hit from improved equity market. Bond yields are now at historic lows. “Over the course of next year, conditions for bonds will sour,” it predicts. “Notably, a faster rate of U.S. economic growth will set the stage for rate hikes of 125 basis points by the Bank of Canada, beginning in June, and 75 basis points by the Fed, starting in August. Despite the projected widening in short-term spreads, we see longer-term spreads only edging wider.”