Business
All articles
Stock market riddle: Why has the stock market soared in the US and faltered in Israel?
While the US stock market is in a state of boiling, the Israeli stock market is having a hard time raising its head.
A number of reasons contribute to this, from investments by institutional entities in Israel in foreign companies to Israeli companies that prefer to recruit abroad
Tags
Stock Exchange
Wall Street
Capital Market
stock
Prof. Nissim Ben David
Wednesday, 03 March 2021, 17:58 Updated: 18:25
Share on Facebook
Share on WhatsApp
Share on general
Share on general
Share on Twitter
Share on Email
0 comments
The value of the shares (economic value) of a public company should be estimated according to the equity plus the discounted future value of its profits.
However, there are situations where the stock market swells anomaly so that the value of the companies traded in it is significantly higher than the real economic value.
Under such conditions, there is a higher risk that the stock market value of companies will converge to true value, a process that will be reflected in a decline in the value of the stock market.
Some investors and investment companies try to identify the state of the capital market and moderate the volume of their investment in cases where they identify major risks of decline or even crash.
These risks may increase as stock prices rise sharply in a short period of time, an increase that is not necessarily due to an increase in the economic value of the shares.
In the last two years, there has been a significant increase in the value of shares traded in the US, which is also reflected in the changes in the US Federal Reserve's interest rate that fell from 5% in 2007 to zero in recent years. .
The decline in interest rates reduced the incentive to invest in interest-bearing assets and instead increased the preference to invest in equities, a factor that contributed to rising demand and rising stock prices.
But when comparing the Israeli stock market to the US, according to data from the Israel Stock Exchange, the value of the Israeli stock market in 2020 is lower than in 2007 in nominal terms, while the value of the US stock market, according to data published on Siblis Research, has risen by about 150 percent.
Moreover, when examining the value of the Israeli capital market in relation to the gross domestic product, which expresses the annual total production value of goods and services, it turns out that this ratio was about 1.2 times GDP in 2007 in Israel, while in 2020 it reached only about half that value. This ratio was equal to 1.36 in 2007 and 2.42 in 2020. These figures reflect a huge and much larger increase in the value of the US stock market in relation to the volume of total economic activity in the United States compared with the corresponding figure in Israel.
It is also worth mentioning that a significant part of the increase in the US in this index occurred in the years 2019-2020.
It is also important to emphasize that in 2020 about two-thirds of the value of the US stock market is due to the value of the 500 largest companies traded in it.
Good to know (promoted)
How to choose the most suitable seating system for your living room?
To the full article
Prof. Nissim Ben David, President of the Western Galilee Academy (Photo: A slightly different photo - David Moyal)
Fools of Prophecy
Two questions arise in the context mentioned: the first is whether the value of US stocks is justified and reflects a technological revolution that will lead to a future rise very evident in corporate earnings, an increase that justifies the considerable increase in value that occurred the last two years, or is it a bubble that could burst?
The second is, why there is such a gap Regarding the increase in the value of the Israeli stock market compared to the American, regarding the first question, as the saying goes: "The prophecy was given to fools."
Regarding the second, it is worth examining what caused the "stock market" to dry up. Is an increase in the share invested by Israeli investment funds, pensions and provident funds in foreign financial assets and a decrease in the share invested in Israel. The second is capital raising by Israeli companies on foreign exchanges instead of in Israel, and the third is the fact that Israeli companies traded in the United States and not in Israel), companies whose share capital value has risen significantly. The
author is a professor of economics and president of the Western Galilee Academy.
Share on Facebook
Share on WhatsApp
Share on general
Share on general
Share on Twitter
Share on Email
0 comments
