This has been a cycle like no other, so there is little reason to expect the stock market to follow historical patterns according to GamePlan, a new equity markets report by BMO Nesbitt Burns Economics.

“The good news is that much of the bad news is now priced into stocks, and a rebound is coming,” says Dr. Sherry Cooper, chief economist BMO Nesbitt Burns. “From an economic perspective, the second half of the year should prove better for equity markets, and Canada will continue to outperform.”

In the report, Cooper notes that Canada is a winner in this troubled economic and financial environment. “We have the strongest economy in the G7,” she says. “Moody’s Investor Services recently restored our triple-A rating; the Bank of Canada is flexing its muscles, tightening independently of the U.S. Federal Reserve Board; and the Canadian dollar has risen this year.”

“We are at the stage of the economic cycle when Canada typically outperforms,” says Cooper. “Basic industry manufacturing, natural resources and merchandising beat the TSX as a buoyant domestic consumer and rising global growth boost corporate revenues and profitability. Gold stocks are surging and corporate governance issues are not plaguing Canadian companies the way they are in the United States. Compared to the U.S., we seem a haven for safety and soundness.”

The report notes that have high confidence that the corporate scandals weighing on Wall Street valuations will be far less prevalent in Canada.

It suggests that equity markets outside of the U.S., including Canada’s, stand to benefit from a portfolio shift out of U.S.-dollar assets in anticipation of a material decline in the U.S. dollar. The U.S. dollar started falling earlier this year, and net foreign purchases of U.S. securities have weakened sharply.

The report forecasts that inflation will surprise on the downside in North America, and low inflation is usually a major plus for the stock market.

It also suggest profits are beginning to stage a vigorous rebound, partly due to cost cutting. It notes that these factors will be key to higher equity prices once the scandals and geopolitical concerns weighing on investor confidence wane.

The report recommends investors overweight Canadian equities, underweight U.S. equities, and begin increasing equity allocations gradually, while reducing holdings of bonds. It also urges investors to start putting cash back to work.