Israeli Stock Market's Election Response: Uncertainty Priced In Before Vote
Translated & summarized from Ice by baba
A Tel Aviv Stock Exchange report indicates that the Israeli market prices in political uncertainty before elections, with weakness often preceding votes that lack a decisive outcome. Historically, the TA-125 index has shown strong returns in the year following elections, often in sync with global markets. While indecisive elections cause a pre-election dip, the market tends to recover quickly, suggesting short-term impacts. The report emphasizes that market direction ultimately depends on fundamental economic data, not just election results.
The story in 5 lines · by baba
- Israeli market weakness often precedes elections without a clear outcome, but this impact is typically short-lived.
- The TA-125 index historically yields strong returns in the year following elections, aligning with global market trends.
- Market fear of political uncertainty is priced in before election day, not usually as a surprise afterward.
- The shekel tends to strengthen more significantly after elections than before, reflecting reduced political risk.
- Long-term market direction in Israel depends on fundamental economic data, not solely election outcomes.
A report by the Tel Aviv Stock Exchange's research unit, analyzing ten Israeli election cycles since 2003, reveals that the market tends to price in the fear of political uncertainty and a lack of decisive outcomes before election day. While the TA-125 index has historically delivered an average annual return of approximately 16.4% in the year following elections, compared to a long-term average of 11.5%, these gains are often linked to broader positive global market trends. The study, presented by macroeconomist Nissan Avraham, found that market weakness is more pronounced in the months preceding elections that do not lead to a clear government formation, but these gaps tend to close quickly afterward.
Examining the period before and after elections, the research indicates that the Israeli stock market and the shekel have historically performed positively in the year following elections. The TA-125 index averaged a 16.4% return in the 12 months post-election, outperforming its long-term average. However, this performance often coincided with strong global markets, such as the S&P 500, which saw an average return of 13.1% in shekel terms post-election. Interestingly, the Israeli market sometimes lagged the US market before elections but outperformed it afterward, suggesting that pre-election weakness is not necessarily indicative of long-term decline.
The report further highlights that in elections without a decisive outcome, the TA-125 index experienced an average decline of 5.3% in the three months prior, compared to a negligible 0.2% drop in elections that led to government formation. Despite this pre-election dip, the performance gap between decisive and indecisive election outcomes narrowed significantly within months, with returns becoming nearly identical after five months. This suggests the market anticipates political deadlock, and its impact is often short-lived.
While recent weakness in the local market might suggest investors are factoring in a scenario of no clear winner, the report cautions that stock prices are influenced by numerous factors including interest rates, inflation, growth, corporate earnings, geopolitics, and global trends. However, historical data consistently shows that fears of political uncertainty are typically reflected in the market before elections. The shekel also plays a role, historically strengthening more significantly after elections than before, potentially due to reduced political risk and clearer economic policy outlooks.
Ultimately, the study concludes that market performance is less about who wins and more about the certainty elections provide. While the market prices in the risk of political stagnation, it does not view it as a long-term threat. The key determinant for future market direction will remain the fundamental economic data of Israel, rather than solely the election results.
