In a new report, BMO Nesbitt Burns chief economist Dr. Sherry Cooper acknowledges that the markets have been through a very tough time, but she sees good times ahead in 2003.

“It has been a very tough period for investors and businesses as we have seen three consecutive years of sub-par economic performance and dramatic declines in stock prices. For the first time since 1930, bonds have outperformed stocks for three consecutive years,” notes Cooper.

In the report, Cooper says that the U.S. economy is still on shaky ground, while the Canadian economy has benefited from its relatively heavy component of cyclical sectors such as energy, steel, autos, gold and base metals. It warns that consumer debt burdens have never been higher in either country. “This is a ticking time bomb, ready to go off the next time that interest rates rise meaningfully or unemployment moves upward. Never before have households in Canada or the U.S. held a smaller share of their home value in equity. But for now, house prices are rising, interest rates are low and the party continues.”

Coopers says that it is still too early to confidently call a bottom in the stock market. “Given typical seasonal patterns, we may well test those lows in September or October, but the dramatic P/E multiple contraction may be nearly complete,” she says.

Either way, it insists that 2003 will be a much better year for financial markets and for the economy. Cooper forecasts that stocks will outperform government bonds and corporate credit spreads will narrow. She says the Canadian dollar will peak at about 66¢ and interest rates will rise only moderately. As well, “inflation will remain low and stocks will finally post positive annual returns — for the first time in four years,” she says.

Coopers also says that there will be no rate hike in the U.S. until well into 2003. She says that the Bank of Canada can afford to tighten. “Chances are however, the Bank will sit out the next policy statement date on September 4.”