North American financial markets may have faced unprecedented turmoil this year, but “an oasis of relative calm” in recent weeks points to a happier new year for investors, according to a new report by CIBC World Markets.

In the report, senior economist Avery Shenfeld acknowledges that the state of the global economy has deteriorated in the past month, and says a winter of “discontent” is in store, with even deeper dives in earnings and growth in Canada and the U.S.

But Shenfeld notes that the S&P 500 is essentially no worse off than it was back in mid-October, and the TSX is moving in a “sideways trend,” even despite plummeting oil prices.

“We can’t call this optimism, but it’s worth exploring why greater doom in the outlook is no longer punishing equity markets as much,” wrote Shenfeld.

The CIBC World Markets economists say 2009 will not be another losing year for equities, since stock valuations appear to have already discounted much of the bad news.

The report suggests that the market may be hitting its bottom now, since Canadian equities tend to bottom between three and nine months before the end of a U.S. recession, and the recovery appears set to begin in the second half of 2009.

The bank’s target for the TSX is 11,000, down 1,000 points from its previous target.

But despite these potential returns upwards of 20%, the economists caution against investing aggressively in stocks.

“The near-term risks to the market from a contracting North American economy argue against overweighting stocks for now,” the report says. The economists recommend focusing on equities in defensive sectors such as consumer staples and utilities.

The bank expects TSX earnings to fall 15% in 2009, against a backdrop of very difficult economic conditions and eroded resource prices.

CIBC World Markets has also slashed its growth outlook for the Canadian economy in the next few quarters, as deep cuts in automotive production and eroding housing activity take hold.

The bank expects real GDP to decline by 1.8% and 0.1% in the first and second quarters of 2009 respectively, followed by growth in the second half of the year. But the economists warn that any economic growth late next year is heavily dependent on massive stimulus measures in both Canada and the U.S.

Overall, CIBC calls for an annual GDP decline of 0.3% next year, and growth of 0.6% for 2008.

A “sharply higher” unemployment rate is also in store for the months ahead, the economists warn.

IE