Don’t worry too much about the recent drop in the equity markets. The drop is likely to be temporary, according to BMO Harris Private Banking’s latest Market Commentary report.

The firm is sticking to its cautiously optimistic 12-month outlook despite economic turmoil in Europe and anxiety over the much talked about “fiscal cliff,” the anticipated and potentially disastrous spill an ailing U.S. economy will take if Congress is unable to prevent $600 billion in automatic spending cuts and tax hikes from going into effect in January.

Despite the hurricane-force headwinds, the firm anticipates moderate global economic growth, with projected U.S. GDP growth of about 2%. It also forecasts modest, positive equity market returns that outpace fixed income investments. Although BMO Harris Private Banking expects corporate earnings to be flat in the next 12 to 18 months, it still believes that equities provide good value based on their dividend yields, which are superior to bond yields.

The firm is putting its money where its mouth is. It continues to slightly overweight equities but is steering away from stocks in the Eurozone, where it anticipates disappointing growth.

“While the equity markets’ recent slump is of some concern, we believe it will likely rebound as investors gain more clarity on the Greek austerity vote and as a consensus builds around the U.S.’s bipartisan agreement,” Richard Mason, head of Investment Management at BMO Harris Private Banking, said in a statement.

BMO Harris Private Banking believes that the U.S. government will find a way to avert going over the fiscal cliff or minimize its impact. “We believe that both parties are well aware of the stakes and expect to see them move forward with a bipartisan compromise to prevent the full impact of the planned tax hikes and spending cuts from hitting the economy,” the report says.

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