TD Waterhouse today offered insight into future market trends and their impact on investment portfolios in 2008.

The brokerage firm predicts that, despite continuing fall-out from the subprime lending crisis, several positive factors in the U.S. economy will more than offset the negatives and will cause the U.S. stock market to rise for its sixth consecutive year.

“There has been so much coverage of the subprime crisis that we believe it’s already embedded in current market prices. Therefore, other strong fundamentals, when combined with the stimulative effect on markets of the presidential cycle, will outweigh the subprime impact and keep the economy out of recession territory,” says Bob Gorman, chief portfolio strategist, TD Waterhouse.

TD Waterhouse says most likely outcome for the U.S. stock market next year is being high single-digit returns.

The Canadian equity market, like its American counterpart, should rise for a sixth consecutive year and generate single-digit returns, TD Waterhouse says.

The impetus in 2008 will not come from commodity prices, as was the case through much of the current bull market. Rather it will come from the continued rotation into less cyclical sectors, exemplified by major insurers like Manulife, Sun Life and Power Financial, the brokerage says.

Fixed income investors will earn between 4 to 4.5% in 2008 – more than the sub-coupon returns generated in 2007. Slower economic growth should translate into a lack of upward pressure on bond yields. After the widening of corporate bond spreads in 2007, we expect corporates to outperform government bonds in 2008.

Europe should once again be the best-performing major international market, generating positive, single-digit returns. This reflects solid earnings and dividend growth along with good valuations. Japan, after a poor year in 2007, will likely post better returns, close to those in Europe.

Caution is warranted in the emerging markets in 2008, TD Waterhouse says. They are no longer cheap and are, as a group, fully priced. As well, monetary policy is tightening in several cases, particularly in China where inflation is an issue.

Gorman concludes that, “Overall, we expect financial markets in 2008 to overcome significant, well-documented risks and generate solid returns.”