The worst period in generations for Canadian equity returns may already be over if credible fiscal stimulus packages are launched in North America in the coming weeks, notes a new report from CIBC World Markets.

“The bad news is that we are in a recession, and a fairly deep one at that. The good news is that the stock market has already discounted a depression,” says Jeff Rubin, CIBC World Markets chief economist and chief strategist, in his latest Canadian Portfolio Strategy Outlook Report.

“That’s why no matter how severe the recent non-farm payroll losses are” or how dismal the manufacturing index numbers get, “the stock market soon shrugs it off.”

But hope for a lasting rally and recovery from the current crisis “is centred on meeting an unprecedented financial shock with an equally unprecedented dose of monetary and fiscal stimulus,” the report states.

“Stocks can only cheer as businesses and households will be force-fed stimulus money from governments that will no longer care about deficits,” says Rubin. He adds that with deep interest rate cuts and fiscal stimulus efforts underway in most of the world’s major economies, global growth is likely to return by the second half of 2009, spurring on the TSX composite index. “With the market having set the bar so low insofar as the economy is concerned, the slightest pulse in second-half growth should send the TSX climbing to 11,000 by year-end.”

Rubin expects some progress toward that target in the next two quarters, but the majority of the climb will come after a mid-year economic upturn. For that reason, he remains “market weight” on equities in his model portfolio.

Rubin’s recommended portfolio weights continue to steer away from the sectors most exposed to downside economic risks, with “overweights” in some of the traditional safe havens like utilities and consumer staples.

He is recommending heavy “underweights” in equities tied to consumer discretionary spending and autos.

Rubin has made two slight weighting changes to his model this month. Firstly, as a result of more realistic valuations in the technology sector, he no longer suggests as heavy an “underweight” stance and has added a percentage point of exposure.

That move was funded by a single point reduction in his already underweight position in industrials.

Meanwhile, for commodities, the report notes that non-precious metals and lumber are still mired in recessionary conditions, and base metals will post much lower average prices in 2009.

“But we continue to favour gold as a hedge against an eventual return of both inflation and U.S. dollar depreciation,” the report states.

As for oil, the seeds are being laid for a sharp rebound in crude prices during the next global recovery with a taste of that to come in late 2009.

“It won’t be very far down the road of an economic recovery before we encounter triple-digit oil prices again. And when we do, our overweight in oil stocks will be there to reap the rewards,” Rubin says.

IE