What a week we’ve had! The Israeli stock market is exploding to a new record after a 10% rise in a single week, the Shekel is back to being king, Gold continues its way up, and Iran is teaching everyone a lesson about the limits of power. Let’s understand—through our money (and mostly the money of others)—what is really happening here.
We’ll start with the Israeli stock market. It’s not every week that a major stock index—any index—rises by 10%. How do you explain this, especially in a war zone that is still (as of this moment) considered an active combat zone, with missiles falling in real time?
Well, the answer is simple. The stock market always trades based on forward-looking expectations. That is, stocks are purchased today by investors who believe the future will bring an improvement in companies’ conditions and higher profitability and sold by those who think the opposite. The principle is: both sides (buyer and seller) are thinking about the future, not about what is happening right now. Therefore, the fact that missiles are still falling and enemy drones are still hovering across the entire northern part of Israel doesn’t really affect the buyers; on the contrary—they purchased stocks this week out of the expectation that this situation will improve, and soon.
Additionally, and in a complementary fashion, the Israeli Shekel has also begun to strengthen against the Dollar, approaching the level of three Shekels per Dollar—a level not seen in 30 years. This is happening for two reasons: the first is similar to the reason Israeli stocks rose. If the state of the Israeli economy does indeed improve, its currency is also expected to strengthen. A good economy attracts foreign investment; foreign money flows in and raises the value of the local currency (the Shekel, in this case). The second reason is that US stock indices also rose nicely this week (4%-5%). How is that connected?
The largest investors in Israel are the public’s long-term savings funds (pension funds and provident funds), managed by investment houses and insurance companies. These funds hold a bit more than a trillion dollars. Quite a lot. A portion of these funds is invested in US stocks (roughly a quarter). When US stocks rise, the portion of the funds linked to the Dollar essentially increases, and the investors in these funds find themselves, unintentionally, more invested in the US Dollar. Therefore, fund managers must sell some of the Dollars to return to the proportions that existed before the gains. This is called “correlation,” and as of today, it is commonly assumed that there is a correlation of about 30% between the behavior of US stock indices and the Shekel-Dollar exchange rate.
How does this manifest in reality? If US stocks rise by one percent (for example), the Dollar exchange rate against the Shekel will weaken by about a third of a percent as a result of that rise. Of course, there are many other factors affecting the Shekel-Dollar rate, but if we assume for the sake of discussion that they neutralize each other, we understand that as long as US stocks rise, the Shekel is expected to strengthen against the Dollar—not by the full rate of the rise, but by a portion of it.
Thus, this weekend finds us in a very optimistic position for investors—both in the US, specifically in technology indices which were the spearhead of performance this week, and in Israel—where they especially love defense stocks (wonder why), and finance stocks (banks, insurance companies, investment houses), which know how to profit handsomely from both the economy and the stock market itself.
An update on Gold. In previous reviews, I analyzed the surprising drop in Gold during the month, as well as its recovery. This week it was published that the Central Bank of Turkey sold about a quarter of its gold reserves this month (basically—the reason is a need for liquidity in the coffers, or what is known as—bring us the cash...), and such an amount—roughly 20 billion dollars in value—is enough to affect the price of gold significantly. It is likely that this action pulled more sellers with it, and together there was a strong, localized effect on the price. The Turkish Central Bank still has a holding of about 100 billion dollars in gold value, and if it decides to continue selling, it could continue to affect gold prices in the markets. My assessment—not going to happen and not going to happen. Meaning, it will not continue to sell in massive numbers, and therefore it will not have an effect.
We could see that as soon as this seller disappeared (or at least, the pace of sales slowed), the gold price returned to its long-term trend—upward. As I explained in previous reviews, there are good reasons for gold prices to rise over time (protection against inflation, government debts, devaluation of money, geopolitical instability), and therefore—unless there is a significant localized event like this, I don’t see gold prices dropping anytime soon.
Let’s return to the Persian Gulf, and what a joy it was to talk about everything except it until now. As of now, the ceasefire continues to hold, the parties continue to threaten one another, and the market is mostly struggling to ignore the event. Oil prices dropped by one step, from areas of 110-115 dollars per barrel to slightly below 100 dollars, as if to say—we’ve lowered the flames a bit, but as far as we’re concerned, we haven’t returned to routine; the parties are requested to close the event.
Since I don’t see any side with a real interest in continuing the state of war (perhaps with the exception of the current government in Israel, and that is a matter for a purely political column—not here, please), my working assumption is that the state of non-combat will continue. As mentioned in previous reviews, I predict that the markets won’t care what it’s called or who is declared (by themselves or others) as the winner—as long as the cannons are not roaring, and more importantly—the straits are open, the world can return to its ways, and whoever’s home was destroyed—that’s their problem. Not ours.
In other words, any state of non-combat—from a stuttering ceasefire to a full peace agreement—will shift the discussion back to the growth of technology, employment data, interest rates that can return to a path of decline, low and stable oil prices—and above all, business. And in business, gentlemen, the US still knows how to work, and work properly. And Israel still knows how to open and sell knowledge industries to the world. That is, investors will return to focusing on how to invest their money, rather than how to flee from investments and entrench themselves in cash. And those are good news for every one of you who holds any asset (stocks, bonds, gold, or private capital).
My friends, investors in private and commercial real estate, you are a separate category. Know that although the economy is a system of connected vessels, and what affects one side will affect the other, you cannot analyze the viability of your investment based on the behavior of traditional markets (in simple words—the stock market). Your analysis tools must be more closely linked to additional parameters—employment in your potential tenant market, demographics in the surrounding area (district/country), average wage (or company profitability, if you are in the commercial real estate market), and above all else—the interest rate on mortgages, which doesn’t always behave one-to-one with savers’ interest rates.
In next week’s review, I will linger a bit more on the subject of real estate and provide some data (you know me—not a pile of trees hiding the forest, only what is truly important) so that you can make informed decisions, rather than just a gut feeling or using slogans you heard from friends over the weekend. Generally speaking, real estate behaves a bit like a slow ship in a sea of speedboats, but when this ship turns the wheel, it is hard for it to return quickly to the previous path.
See you in next week’s letter, or during the week—if I can’t help myself until then...