Israeli Stock Market Signals Potential Economic Slowdown
Translated & summarized from Maariv by baba
The Israeli stock market's TA-90 index has dropped 20% from its peak, potentially signaling an economic slowdown in 2027, according to Meitav's chief economist. This index, representing mid-sized companies, typically leads GDP growth by six months. The decline may also reflect political uncertainty ahead of elections, making it difficult to isolate economic factors.
The story in 5 lines · by baba
- The TA-90 stock index has fallen 20% from its peak, potentially indicating an economic slowdown.
- The TA-90 index typically predicts Israel's economic growth about six months in advance.
- Mid-sized companies in the TA-90 are more sensitive to domestic economic factors than large-cap TA-35 companies.
- The stock market's decline could also be influenced by political uncertainty surrounding upcoming elections.
- Distinguishing between economic slowdown fears and political uncertainty pricing is currently challenging.
The Israeli stock market may be signaling an upcoming economic slowdown, with the TA-90 index experiencing a significant decline. According to an analysis by the chief economist at Meitav, the TA-90 index, which tracks mid-sized companies more sensitive to the local economy, tends to predict Israel's growth trajectory about six months in advance. The index has fallen approximately 20% from its peak, raising questions about whether this trend indicates a potential slowdown in the Israeli economy in 2027, contrary to current forecasts of economic acceleration.
The analysis highlights that the local stock market not only reflects the economy's current state but can also precede it. While the correlation between stock performance and GDP growth in the same quarter is limited, it strengthens considerably when stocks lead GDP figures by six months. The TA-90 index shows a higher correlation with GDP growth compared to the TA-35 index, particularly when leading by half a year.
This difference is attributed to the composition of the indices. The TA-35 includes large companies heavily influenced by global factors like currency exchange rates, international demand, commodity prices, and foreign capital flows. In contrast, the TA-90 comprises a higher proportion of medium-sized companies, such as those in real estate, retail, services, and infrastructure, whose profitability is more closely tied to domestic consumption, investment, credit conditions, and the labor market.
Consequently, the TA-90 is more sensitive to shifts in expectations about the local economy. When investors anticipate a weakening economy, this sentiment may appear first in the stock prices of domestically focused companies before impacting official GDP data, which is released with a delay. Therefore, the stock market can serve as an early, albeit not definitive, indicator of economic activity.
However, the recent drop in the TA-90 is not considered a definitive signal of an economic slowdown. Meitav notes that the decline could also reflect uncertainty surrounding upcoming elections, rather than solely a change in expectations for real economic activity. In a period where local risk premiums are influenced by political and security situations, distinguishing between fears of an economic slowdown and the pricing of general uncertainty is challenging.
