Stocks still a good bet, says CIBC

That being said, he expects the summer months will offer little growth, and that investors should simply sit tight and buy on the dips.

“Only the most nimble market timers should think about going underweight equities at this point in the cycle,” he writes in his latest Canadian Portfolio Strategy report. “Anything more than a 10% further correction would represent a good opportunity to add weight.”

He suggests that while much attention has been paid to deleveraging of household and corporate balance sheets in the U.S., Canadian consumers and businesses are actually sitting on a substantial hoard of cash, having not been overburdened with debt leading into the recession.

Cash held by individuals will eventually either be spent or invested; either way, it will benefit the stock market. The capital on corporate Canada’s balance sheet should allow most companies to ride out the recession.

Shenfeld says central banks are still determined to provide liquidity to the market, further strengthening his own conviction that stocks will rally again before year end.

“Policymakers haven’t exhausted the options available to provide additional stimulus if necessary and investors are rightly rejecting the worst case scenarios kicked around earlier this year.”

Not all central banks seem to be playing along with Shenfeld’s scenario, however. The Bank of England announced today that it will not expand its quantitative easing policy beyond the already-announced £125 billion, effectively capping this stimulus measure for the time being.

Not to be deterred, Shenfeld points out that corporate earnings estimates are improving ahead of the release of second quarter results this month.

He predicts “modest upside surprises in the second half” in Canada, while the American “earnings picture is looking a bit less ugly.”

Earnings in Canada are expected to fall 27% in 2009, a far cry from the 80% collapse seen in the 1990-91 recession.

Year-over-year earnings growth is not expected until Q4, but even that is skewed by the capture of the beginning of the recession in Q3 of 2008 — one year later, one might hope to see some growth off the bottom. The consensus call is for TSX composite earnings to drop 33% in Q2, a moderation of the 43% year-over-year decline in Q1.

“Longer-term valuation metrics still show ample headroom for equities, even if the first year of expansion proves to be as tepid as we suspect,” Shenfeld says.

(07/09/09)