Israeli Investors Brace for Impact of Simultaneous Israeli and US Elections
Translated & summarized from Globes by baba
Israeli investors are navigating a rare convergence of Israeli Knesset elections and US midterm elections this week, both potentially impacting investment portfolios. Historically, Israeli elections ending without a clear government formation have led to market declines prior to the vote, while US midterms have consistently seen the S&P 500 rise in the following year. Analysts suggest that while the US elections might introduce less uncertainty, the Israeli election outcome is seen as more critical for the local market's direction, with potential for significant positive reaction if a clear government emerges.
The story in 6 lines · by baba
- Israeli and US elections occurring simultaneously create a rare situation impacting local investors' portfolios.
- Israeli elections without a clear government outcome have historically led to market declines before the vote.
- US midterm elections have consistently resulted in S&P 500 gains in the year following the vote.
- Market volatility in Israel typically spikes in the weeks after elections as investors adjust positions.
- Political division in the US Congress may curb harmful legislation, potentially benefiting the stock market.
- The outcome of the Israeli election is considered more critical for the local market's direction than the US midterms.
Israeli investors are facing a rare convergence of two major elections within days of each other: the Israeli Knesset elections and the US midterm elections. Both events carry significant implications for their respective countries, but for local investors, the dual political outcomes could impact investment portfolios. The Israeli election is expected to shape domestic economic policy, potentially affecting the local market. Meanwhile, the US midterms can influence the Tel Aviv Stock Exchange through companies with substantial US operations and the strong correlation between Wall Street and Tel Aviv.
Historically, such a close proximity between US midterms and Israeli Knesset elections has occurred only twice in the past 40 years, in 2022 and 1988. The 1988 event predates the launch of major Tel Aviv indices, making direct comparison difficult. In 2022, the Israeli market exhibited a wait-and-see attitude between the elections, while Wall Street experienced volatility attributed to Federal Reserve interest rate hikes and inflation data. Therefore, past data offers limited insight into the combined effect of these two electoral events.
Analysis of Israeli elections since 2003 by the Tel Aviv Stock Exchange's research unit indicates that market direction is heavily influenced by the clarity of a new government's formation. In the 12 months following elections that led to a government, the TA-125 index yielded an average return of 16.4%. Conversely, in the three months preceding elections without a clear outcome, the TA-125 index saw an average decline of 5.3%. This suggests that the local market may already be pricing in a scenario of an indecisive election outcome, although stock prices are affected by numerous factors including interest rates, inflation, and global market trends.
Volatility in Israeli stock indices tends to increase significantly in the weeks following elections, with a 31%-45% rise in volatility compared to a typical week. This heightened activity is attributed to investors adjusting their positions based on their interpretation of the political results and the subsequent uncertainty regarding government formation and budget approval. However, historical data shows that the market often prices in the fear of indecision beforehand, meaning the day after the election may not bring major surprises.
In contrast, US midterm elections have historically shown a positive correlation with market performance. Since 1950, the S&P 500 index has risen in the year following every midterm election, averaging nearly 19%. Experts suggest that political division in Congress, particularly under a Republican president, can be beneficial as it may curb potentially harmful legislation. While the identity of the winning party is less impactful than the reduction of economic and political uncertainty, the current market may be pricing in a Democratic sweep of Congress.
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