BMO Nesbitt Burns is bullish heading into the new year and is calling for investors to buy stocks and corporate bonds. BMO says investors need to free themselves from the belief that the weak stock market is signaling an economic relapse ahead.

“The equity market is simply not a good leading indicator in a post-bubble environment. Stock prices were still too high entering 2002. You don’t need a bad economy story to explain the third year of equity price declines. They were almost entirely driven by a move to more sustainable and more normal equity-market valuations.”

BMO recommends increasing portfolio weight in equities and corporate bonds, reducing cash and government debt, and diversifying away from U.S. assets to avoid the ongoing U.S. dollar decline. “Our valuation model shows Canadian government bonds at their most overvalued level ever – and suggests stocks are attractively priced. In short, 2003
will be a better year and we would like to see our customers on board to enjoy the markets’ performance.”

BMO believes investors will find new reasons for hope in 2003. It predicts: the Iraqi war will end quickly, and the North Korean situation will be defused; oil and gold prices could recede; government bond yields will rise from current risk-averse levels; the U.S. dollar’s fall will continue, helping U.S. industry recover, while also causing global
investors to diversify into non-U.S. assets in a self-sustaining circle of causation. “This could be reinforced by sustained strong Asian growth along with improved performance from Europe and, more speculatively, maybe even Japan.”

“Stock market history teaches us that the first year pickup in equity prices following the end of a lengthy bear market is very substantial an overwhelming majority of the time. This is one of the most regular of the stock market’s regularities. Therefore, we do not buy the statesmanlike compromise put forth by many stategists calling for moderate equity market gains in 2003. Either the gloom will lift and the markets will pop, or our basic assumptions will prove wrong and the market may fade further.” BMO is betting on the former.