Who needs the Santa Claus rally? We've got the Ralphy rally.
While we're not certain the honourable member from Wascana, Sask., could squeeze down a chimney, Ralph Goodale sure does a fine St. Nick impersonation. By stuffing his sack with dividend tax credits for all the grown-up girls and boys and promising to let them stay up late playing with their income trust toys, he's all but assured that Canada's stock market will finish 2005 with bells on.
The jingling sound from the Toronto Stock Exchange could be heard clear across the Prairies yesterday, as the S&P/TSX composite index rocketed 226 points to a new five-year high in the first minutes of trading, declaring its relief at the government's decision not to tax income trusts and to cut taxes even further on dividends.
Led by dividend-paying companies -- banks, telecoms, insurers and utilities -- the index finished with a gain of 162.02 points or 1.5 per cent, at 11,081.82. The reaction from trust investors was even more decisive, as the S&P/TSX capped income trust index leaped 4.4 per cent.
At the Grey Cup this weekend, they won't be cheering for the Eskimos or Alouettes. They'll be chanting "Ral-phy, Ral-phy." All of which is grand news for investors. But can the Ralphy rally last? Probably.
One reason to believe it's more than a one-day wonder is that, historically, stocks have reacted favourably to dividend tax cuts. In 2003, the year U.S. President George W. Bush slashed taxes on dividends, the S&P 500 surged 26.4 per cent. That was partly because dividends were suddenly worth more on an after-tax basis, and also because companies initiated or sweetened payouts to maximize the impact of the new rules.
Another reason to expect continued strength is that, after Dec. 16, income trusts will be added to the benchmark S&P/TSX index. To the extent that trusts are now seen as safe (or at least safer than they were) from the tax man's scythe, and given that index investors will now have no choice but to buy them, it can only be a positive for the S&P/TSX.
Seasonal factors could also come into play. According to the Stock Trader's Almanac, December is historically the best month for U.S. stocks, as measured by the S&P 500.
This is partly because stocks tend to rise in the last five trading days of December and first two of January, a trend known as the Santa Claus rally.
When U.S. stocks rise, Canadian stocks often, but not always, go along for the ride.
And let's not forget that intangible known as momentum. Remember the dark days of October, when the market seemed to be plunging 100 points on a daily basis? So far in November, the S&P/TSX is up 698.5 points, more than erasing the 628.51-point drop in October. The wind is now at the S&P/TSX's back.
"It's a dramatic change from what we saw just last month, when we had massive declines practically day after day, so it's a huge turn in sentiment," said Elvis Picardo, chief market strategist at Global Securities Corp. in Vancouver.
How high can the S&P/TSX go?
Mr. Picardo, for one, says he wouldn't be surprised to see the S&P/TSX eclipse its record close of 11,388.8, hit Sept. 1, 2000, some time before the end of January.
"I would think that this would herald the start of a rally that could take us into the early part of next year. A dividend tax cut is a pretty significant event," he said.
Not everyone believes we're on the cusp of a huge uptrend. Garey Aitken, portfolio manager at Bissett Investment Management in Calgary, notes that institutional investors tend to realign their valuations quickly, as evidenced by the swift reaction yesterday to Mr. Goodale's pre-election gift.
But even he expects the rally to continue for at least a day or two, largely because American investors will be returning from yesterday's Thanksgiving Day holiday and adjusting their portfolios accordingly.
"U.S. buyers of Canadian securities, that's a pretty significant force, and they're all eating turkey," he said yesterday.
© The Globe and Mail
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