Sound Bites: A taxing risk to Canadian growth

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Strong Canadian growth on the back of net tax cuts unleashed by the federal government in its 2016 budget, along with infrastructure spending that is just starting to kick in, should add some fuel to the fire for domestically-focused Toronto stocks. On Monday, the mid-cap oriented INK Canadian Insider (CIN) Index moved through 1,190 which is a key technical level

Monday's advance took place on the back of strong broad-market insider sentiment as measured by our INK Indicator. Toronto insiders continue to be in a bullish mood with the indicator still above 100%. When the indicator is above 100%, there are more stocks with key insider buying than there are with selling. 

The INK CIN Index is trading in an uptrend, but will policy risk derail the rally?

The combination of a rising INK CIN Index and a firm INK Indicator suggests that Toronto stocks may have more room to run this fall. That said, policy risk has emerged. Over the summer, the Liberal government has started talking tough about raising taxes on some small businesses. While the discussion of the proposed tax hikes tends to centre around tax fairness, the bottom line for stock market investors is the impact the debate and measures will have on business confidence.

The Canadian Federation of Independent Business confidence surveys have been slipping recently, and we suspect that uncertainty surrounding potential small business tax hikes is playing a role. With Parliament back in session this week, we will have to see if the government sticks to its guns or offers a more conciliatory approach. Either way, the debate is unlikely to immediately derail the Canadian economy and the stock market rally. The story might change if the Finance Minister doubles down on his plans. In which case, we will be keeping a close eye to see if small business gloom starts to impact insider sentiment in domestically-focused sectors.

I discussed this emerging risk to the Canadian economy and the worrying trend of governments raising taxes with Jim Goddard on This Week in Money. Listen to or download the interview below. The discussion starts just before the 51-minute mark. You can also catch it on Howestreet.com's YouTube channel.

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