BMO Nesbitt Burns is confident that 2003 will be the first positive year in four for the stock market.

“The outlook for stock markets in 2003 hinges on investor willingness to take more risk,” argues Nesbitt. Everything from weak economics to corporate scandals and fear of renewed terrorist attacks, has clouded households long-term view for financial prospects.

“The American public was far more heavily exposed to the stock market when the bubble burst than the people of any other country. At the peak of the market in early 2000, stocks represented a larger share of household net worth than residential real estate. This was never the case in Canada, Europe or Japan. Household net worth has plummeted relative to income, and savings rates have finally begun to edge upward,” Nesbitt says. “So it is not surprising that risk-taking in the U.S. has been rare for nearly three years.”

Iraq, North Korea and Venezuela are all reinforcing risk-averse behaviour, BMO says. “Until these uncertainties are cleared away, it is unlikely that Corporate America will contribute much to the recovery. But a corporate rebound is a necessary condition for a more fulfilling resurgence in economic growth and stock valuation.”

There are plenty of positives for 2003 though, including improving economic fundamentals such as stimulative monetary and fiscal policy, strong productivity, and rising global growth. “Once the uncertainty surrounding Iraq and North Korea dissipates — likely by the end of the first quarter — a much brighter outlook will emerge,” Nesbitt predicts.

“If anything, growth in the U.S. could surprise on the high side this year. That will be good for the stock market, but not so good for bonds. Interest rates have likely bottomed as has U.S. inflation. The Canadian economy will benefit from a stronger U.S. economy and with its greater cyclicality, the TSX could well outpace the S&P 500 this year, especially in the first half when gold, oil and bank stocks continue to do relatively well.”