Israeli Stock Market Fears Election Stalemate, New Risks Emerge

The Israeli stock market is anticipating a potential political stalemate following the upcoming elections, according to a new analysis by the Tel Aviv Stock Exchange. The study, conducted by macroeconomist Nisan Avraham, examined ten election cycles since 2003 and found a consistent pattern: investors tend to sell off stocks in the three months preceding elections that are expected to result in political deadlock. During such periods, the Tel Aviv 125 index has historically fallen by an average of 5.3%, compared to a mere 0.2% drop when a clear electoral outcome was anticipated.

This year, however, the market faces an additional layer of uncertainty beyond the typical pre-election jitters. The significant economic impact of the proposed judicial overhaul in the past year has introduced a new risk factor. Investors recall how the market reacted negatively to the judicial overhaul plans, which were seen as a threat to stability. The outbreak of war initially boosted the market, as investors believed it would halt the overhaul and increase the likelihood of a government change.

Despite a subsequent market recovery driven by the expectation of a new government, recent months have seen stagnation. This is attributed to the growing realization that the anticipated change in government is not guaranteed. The possibility of the current coalition remaining in power forces investors to re-evaluate risks they had assumed were behind them, particularly concerning the government's future policies.

Interestingly, the research suggests that market performance tends to recover after elections, regardless of the outcome. In the five months following elections without a clear winner, market gaps are almost entirely erased, with a 6.7% return compared to 6.5% in elections with a decisive result. Over the 12 months post-election, the Tel Aviv 125 index yielded an average return of 16.4%, often coinciding with positive global market trends.

The analysis also notes the shekel's behavior, which typically strengthens after elections. While the local currency appreciates by only 1.4% against a basket of currencies in the year leading up to elections, it accelerates to 2.5% in the year following. This post-election shekel appreciation can erode some gains for Israelis investing abroad without currency hedging.

The core conclusion is that the stock market remains politically neutral, prioritizing certainty above all else. Economic fundamentals like interest rates, inflation, growth, and the geopolitical situation are the primary drivers of market direction. However, the lingering impact of the judicial overhaul debate means that the market is now concerned not only with the certainty of an election outcome but also with the specific policies of the incoming government and their potential economic implications.