Oil prices and stock markets are set to rally in the second half of 2010, but market activity will continue to be volatile, according to the Desjardins Group Economic Studies team.

In Desjardins Group’s most recent economic report, its economists call for the S&P/TSX composite index to finish the year at 13,100, up 11.5%, and to rise by another 9.4% to 14,330 by the end of 2011. They expect the S&P 500 to end 2010 at 1,265, up 13.4%, and then rise another 7.5% to 1,365 in 2011.

“The stock markets currently appear to be undervalued,” the report says. “Corporate profits are up steeply and the global economic recovery is not really in jeopardy, despite the fears. The stock indexes should therefore gain back the ground lost in the last few weeks and post substantial gains in the second half of the year.”

But the economists warned that periods of “major turbulence” are possible.

“Investor nervousness has not yet reached the altitudes it did in the last liquidity crisis, but it has surged substantially in the last few weeks,” the economists say. “The markets could undergo another period of intense volatility.”

Desjardins economists predict that oil prices will climb gradually, reaching US$88 a barrel by the end of 2010, and hitting US$100 before the end of 2011. The trend will be similar for most industrial metal prices.

The economists pointed out that economic growth in North America at the end of 2009 and start of 2010 fulfilled even the most optimistic expectations. But they expect this level of growth to slow.

“Although the conditions essential to a solid, lasting recovery are well entrenched, the pace at which the American and Canadian economies are growing can be forecast to slow,” said François Dupuis, Desjardins Group vice-president and chief economist.

Still, Canada is expected to post enviable GDP growth of 3.6% in 2010, the report says. All of the provinces will benefit from a more favourable environment, especially British Columbia and Ontario.

Meanwhile, the U.S. economy faces challenges. The Desjardins economists noted that job creation that is still falling short of expectations, the real estate market is set to pull back with the end of the home buyers’ tax credit program, and the greenback’s abrupt rise will hurt exports.

Overall, the team expects U.S. GDP growth of 3.0% for the year, and 2.8% for 2011, on the gradual winding down of the government stimulus program.

It says the Federal Reserve will have few arguments for proceeding to raise key rates before the end of winter 2011.

While the upheaval in the euro zone presents a major risk to the global economic outlook, the Desjardins economists say the occurrence of another serious financial crisis is unlikely.

“Central banks’ actions and statements have clearly shown in recent weeks that they are prepared to take aggressive action to stave off another crisis,” the report says.

IE