With the United States facing a possible recession, economists are still confident that Canada will hold up better on the strength of domestic demand and commodity market buoyancy.

National Bank Financial notes that three rate cuts by the U.S. Federal Reserve Board this fall have so far failed to trigger a stock market rally as they did in the 1998 Asian crisis. Recession remains a real possibility.

“Recessions tend to be very bad for the stock market. In U.S. recessions of the past four decades, the S&P 500 has declined an average 22.4% from onset of recession to the following market trough. And during these cycles there are few places to hide,” NBF reports. Additionally, every S&P 500 sector lost between 12% and 27% from onset to market trough. The sectors hurt the least were mostly anticyclical or interest-sensitive, it notes — telecommunications, utilities, consumer staples, and health care. The worst hit were financials, technology and industrials.

Despite the gloomy outlook for the U.S., economists see Canada likely riding out the storm. “We continue to see the Canadian economy doing better than the U.S.,” NBF says. “Demand from developing countries for natural resources is still strong and Canadian financial institutions are less vulnerable to mortgage market risk than their U.S. counterparts.”

There is plenty of skepticism about this theory, notes UBS Securities Canada Inc. “One reason for the current fear is the belief that the Canadian economy has held up relatively well so far given the dollar’s ascent, so the full brunt is yet to come,” it explains.

“The reality, however, is that net export volumes have already declined by 10 percentage points of GDP since 2002, actually in line with the rise in the [dollar]. And yes, there is more to come, but not as much as most fear,” UBS predicts. “What allows Canada to appear to be decoupling is still solid domestic demand – with tax cuts to provide further support in the New Year. Indeed, this is a virtual replay of 2001, when the US experienced a mild recession and we did not.”

“The bottom line is when Canada experienced more severe cycles, they were largely self-inflicted, and that doesn’t appear to be happening now,” UBS concludes.

That said, NBF says that every recession south of the border has sent the S&P/TSX equity benchmark lower — an average of 23.3% lower from recession onset to market trough. “As in the U.S., the sectors that do best are telecommunications, utilities, consumer staples and health care,” it reports.

“For the U.S. benchmark index, given the current housing slump, the high risk of recession (odds at 50%) and our projected 13% decline of earnings, we reiterate our 12-month target of 1400,” NBF says. “In Canada, our 12-month target for the S&P/TSX is unchanged at 12,800.” It maintains an asset allocation of 40% equities, 45% fixed income and 15% cash.