Gloomy worldviews are unwarranted, says BMO Nesbitt Burns, forecasting a much stronger second half for both the economy and stocks.

“Reading the newspapers these days is enough to induce widespread clinical depression,” says BMO chief economist, Sherry Cooper, in her latest report. “From the root causes of the war in Iraq to the SARS virus, confidence is falling, layoffs are mounting and troubled industries, like the airlines, are gasping for air. Inevitably, these developments, for as long as they last, will dampen economic activity and weaken most financial asset values.”

Cooper says the exceptions have been government bonds, gold, and some commodity sectors, where the falling U.S. dollar and the safe-haven flow out of stocks have triggered a sharp rally.

“But many are now suggesting that the weakness, especially in the U.S., is endemic and fundamental rather than war related,” she notes.

Cooper concedes that the economy has weakened sharply since late last year. But, she says, “It continues to be my view that the underlying fundamentals are sound, and even improving. The excesses of the 1990s are dissolving, U.S. consumer disposable income growth is strong and interest rates are extremely low. The enormous spate of mortgage refinancing activity not only gave households a one-shot dose of equity extraction, but also a sustained reduction in their monthly payments.”

Cooper allows that the Federal Reserve may cut interest rates again. “I don’t think it will be necessary, but a 50-basis point cut in the overnight rate at the next (May 6th) FOMC meeting might well occur,” she says. If it did, the Bank of Canada could also rethink plans for another rate hike. And, fiscal policy is highly stimulative in both countries.

“The war has proven to be far more difficult than the early euphoric response suggested. But unless the U.S. gets bogged down in a Viet Nam-style under-funded guerilla morass, which is highly unlikely, the page will be turned on the Saddam regime and an enormous economic sigh of relief will be sounded,” Cooper predicts.

“My baseline forecast is for a second-half revival in U.S. economic activity, accompanied by a strong rebound in stocks and a large selloff in government bonds,” she says. “There are meaningful risks to this forecast, and we all know what they are. The biggest risk in my view is the timing, the when, but not the if.”