The immediate future for the markets is uncertain, but economic growth should be strong in the second half, says TD Bank Financial Group.

“The war is still in its early days and no one can predict what will happen,” says senior economist Craig Alexander. “Indeed, financial markets are likely to be dominated by the day-to-day developments in the conflict. Meanwhile, the economic data in the near term could provide extremely confusing messages.”

The bank says U.S. economic data will probably show a rebound from the weather-induced weakness on the eastern seaboard in January and February, while at the same time, the effects of the war may be subduing the economy. “While equities initially rallied strongly on expectations of a short and decisive conflict, any expectations that the end of an even brief war will lead to an immediate and sharp acceleration in U.S. economic growth are likely to be disappointed. As a result, the main message is that, even if the war is over quickly, financial markets will have to cope with weak economic reports through the first half of this year,” it says.

But prospects appear brighter in the second half. Business and consumer confidence should return after the war, boosted by expansionary fiscal and monetary policy in the U.S.

“This outlook has significant financial market implications. The acceleration in economic activity will support stronger corporate profit growth – which is a clear positive for equity markets,” Alexander says.

“It will also set the stage for a further sell-off in bonds, with yields rising across all maturities. Money market yields will also rise in Canada, as the Bank of Canada hikes rates by 100 basis points before yearend.”

TD also sees the U.S. Federal Reserve remaining on hold until at least October, “but make no mistake, the next move in the Fed funds rate is up, not down.”

“Lastly, improving credit conditions will see corporate bonds outperform government benchmarks, with the implication that corporate interest rate spreads will narrow,” TD says.