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Here’s why Santa’s come early for the ASX

Look out above!

Yesterday saw the S&P/ASX 200 (ASX: XJO) roar nearly 120 points higher, closing above 5020 points in what The Sydney Morning Herald called a ‘pre-Fed rally’.

It was an enormous relief for investors, who had watched the local bourse fall in each of its six prior sessions.

But their relief was nothing compared to that being felt by BHP Billiton Limited (ASX: BHP) shareholders.

Following months of negative press and heavy losses, their shares finally showed signs of life rising 5.6% for the day.

The move certainly made The Australian Financial Review’s Phillip Baker look good…

On Tuesday, Baker suggested that BHP’s shares might have finally found a floor. It’s about time – they were languishing at levels not seen in more than a decade!

For the record though, I still wouldn’t buy the miner’s shares. Not yet, anyway.

Don’t get me wrong, I love buying shares when they’re cheap. But successful investing relies just as much (if not more so) on minimising your losses as it does picking the winners.

Who knows, maybe BHP Billiton is a winner at this point.

But I’m simply not confident enough about the future of iron ore or oil prices to justify an investment. That’s why I’m laying low on BHP, for now.

But that’s not to say I’m staying away from the share market in general – not by a long shot!

Australian shares haven’t traded at these levels in a long time. In fact, the main index hit a fresh two-and-a-half-year low on Tuesday this week, just before yesterday’s relief rally.

While that could be considered a deal-breaker for short-term investors wanting to profit from daily share price moves, it’s a great thing for long-term investors.

You see, volatility is the cost of investing in the share market.

It occurs naturally, only to become exacerbated upon the release of any fresh economic or company-specific news.

Take the ASX’s recent declines as a great example…

The decline was largely caused by crashing commodity prices which is having a dramatic effect on the federal budget, as revealed on Tuesday. It’s also causing anxiety among investors.

The U.S. Federal Reserve’s pending decision on interest rates was another factor.

Overnight, Janet Yellen and her fellow board members decided to lift interest rates for the first time since 2006.

It was a historic move, albeit an expected one, which The Australian Financial Review said “officially marks the end of the global financial crisis” (emphasis my own).

Of course, there are fears of what this could mean for the U.S. economy, and even the global economy.

Many economists had argued it was still too early for a rate rise, while others said interest rates would likely fall back towards zero again within the coming years.

In reality though, the Fed had to hike interest rates. They’re still sitting at just 0.5%, and will likely increase slowly over the next three or four years, but they had to get the ball rolling at some point.

While investors have been fearing such a move for months however, they actually applauded it overnight.

The Dow Jones, for instance, fell after the decision was read out but still ended the day 1.3% higher. The tech-heavy NASDAQ enjoyed even stronger gains, rising 1.5% for the session.

Locally, the ASX surged another 83 points shortly after the market opened this morning, following on from yesterday’s magnificent 118-point jump.

However belated it might be, could this mark the beginning of a much-needed Santa Rally…?

The truth is, although rising interest rates might seem unnerving to begin with, the decision does reflect the U.S. central bank’s confidence in the American and global economies.

Not everyone might support it, but it certainly feels like a step in the right direction.

But where does all this leave Australian investors? I hear you ask…

The Fed’s decision will take some getting used to, but their show of confidence could well seep through to the Australian economy as well.

With the ASX 200 still sitting near its lowest level in two-and-a-half years despite yesterday’s relief rally, that could be very good news for investors.

Now, I’m not saying that the share market won’t fall any further.

To be clear, I have no idea what the market will do this afternoon, let alone over the next month or year. In truth, nobody does!

But if history is anything to go by, the best time to buy shares in high-quality businesses is when the market throws them out with the bath water.

That brings me to my next point…

While the Fed Reserve has been busy hiking interest rates in the U.S. overnight, our own cash rate is still stuck at a measly 2%.

What’s more, the SMH recently highlighted that analysts from Australia and New Zealand Banking Group (ASX: ANZ) think it will fall to just 1.5% in 2016, even if it takes until August to get there.

That’s great news for dividend investors – particularly those in the market for the fully franked kind.

You see, high-yielding dividend shares act as something of a magnet for investors during periods of low interest rates.

Investors turn out in masses looking for ways to offset the otherwise low returns on offer, and if they can beat the tax man by receiving tax credits in the process, then all the better.

It’s rather fitting then that one of the companies I have my eye on right now is actually the latest Motley Fool Dividend Investor recommendation.

I first bought shares in this company in September this year and, although I’ve already made a small profit (on paper, at least), I’m tempted to go back for more already.

This is a company with a strong balance sheet and plenty of room left to grow – both locally and internationally.

What makes it even more appealing though is its 5.2% fully franked dividend yield. Grossed up, that’s a 7.5% yield!

Another company I think could be worth a closer look is none other than Wesfarmers Ltd (ASX: WES).

While it might be 100-years-old, Wesfarmers is still growing at a healthy clip and, with a number of iconic brands such as Coles, Bunnings, Kmart and Officeworks under its wing, it looks set for a promising future as well.

Wesfarmers’ shares closed at $38.80 on Wednesday, at which price they also offer a forecast 5.2% fully franked dividend yield.

I should note however, that Wesfarmers is currently not an official recommendation on Motley Fool Dividend Investor, unlike the company described before it…

That’s not to say it never will be, but Andrew Page, who runs the service, has been more focused on companies outside the group of ASX 100 shares – particularly those with excellent growth prospects and the ability to continue growing dividends.

To gain instant access to all of Andrew’s official recommendations, I urge you to click here now…

Because if this Santa Rally really does kick off, I’d hate for you to miss out.

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