Despite investor concerns over the impacts of a visibly stumbling U.S. economy, the S&P/TSX composite index remains a good investment bet, finds CIBC World Markets latest Canadian Portfolio Strategy Outlook report.

The report notes that while the U.S. is clearly struggling under the weight of the mortgage crisis, strong fundamentals remain in the Canadian market and investors need to resist the temptation to duck for cover.

“We remain fundamentally bullish on the resource- and energy-laden TSX,” says Jeff Rubin, chief strategist and chief economist at CIBC World Markets. “The advent of US$100 per barrel oil justifies our large overweight in energy stocks, which in the current price environment will soon be attracting considerable M&A activity.”

“Overweights in the base metals and gold sectors reflect our optimism on world economic growth, driven by strong overseas economies, and our pessimism on the U.S. dollar,” Rubin adds.

He remains four points overweight in energy stocks and two points overweight in materials.

CIBC World Markets forecasts the market rally will continue through 2008 with the S&P/TSX composite hitting 16,200 by year end, a total return approaching 20%.

“This rally has none of the excesses that characterized the doomed tech bull market of the late 1990s,” says Rubin. “Dividend yields, for example, have held steady at roughly 21/2%, as growing earnings enabled payouts to climb on pace with stock prices. While that doesn’t sound particularly lofty, the gap to cash and bond yields has been narrowing, and will be further trimmed by a quarter point Bank of Canada cut which seems likely for January.

“Some of the most generous dividend plays lie in banks, a sector we remain underweight given concerns, likely already overdone, about credit exposures,” Rubin says.

But he notes that the highest dividend yield, currently at just under 4%, is in utilities, a sector that also has attraction as a defensive play. “We’re adding a one percentage-point overweight to that sector as a result,” he says.

While the resource and energy sectors remain strong, CIBC World Markets the current struggles in the U.S. economy will adversely affect financial and industrial stocks as well as in the auto parts-related segment of consumer discretionaries in the near term.

Accordingly, Rubin has cut a percentage point from the consumer discretionary sector and remains underweight on financials and industrials.

With the outlook for the American economy remaining gloomy through at least the next quarter, Rubin expects to see another half point rate cut from the U.S. Federal Reserve Board — with the Bank of Canada following with its own quarter point cut.

As a result of these interest rate initiatives he has moved a percentage point from cash to bonds.