TORONTO - Capital-market volatility will continue "in the very near term" but will ease during 2009 and key stock indexes will rise, led by large-company shares, TD Waterhouse predicts.

The forecast for 2009 from the TD Bank's brokerage follows its prediction a year ago that recession and a bear market were unlikely in 2008.

"Looking ahead to 2009, the key questions on the minds of investors are when the heavy volatility will end, what the 'floor level' of the current bear market will be, and when will stocks begin to recover," Bob Gorman, chief portfolio strategist at TD Waterhouse, stated Thursday in releasing the new outlook.

The Toronto stock market - down by half from its peak in June - is forecast to advance, tagging along as the American market, "after experiencing continuing pressure in the near term due to tax-loss selling and hedge-fund and mutual-fund redemptions, will rise in 2009."

TD Waterhouse notes that stock valuations are depressed, bond yields are low, and loosening credit and fiscal and monetary policy will stimulate the economy, while large amounts of cash are on the sidelines and corporate insiders are buying.

"Given their greater financial stability and low valuations, we feel that large caps

offer the best prospective risk-reward relationship," said Gorman.

Returns in the Canadian bond market are projected to be in the same range of 4.0 to 4.5 per cent as in 2008, with high-grade corporate bonds outperforming government issues amid "some reversal of the flight to quality." TD Waterhouse also expects a rally in high-yield debt, as so-called junk bonds "are highly correlated with equities."

European and Japanese stock markets are forecast to produce positive returns, but for emerging markets "caution is recommended for the present and avoidance of direct exposure." TD Waterhouse comments that "there may be some difficulties in Chinese real estate, which could spill over into their banking system."

As for the positive year-ago projection gone awry, Gorman observed: "This prediction was overturned by the unprecedented decline in global financial markets and commodity prices."