Two governments did not survive this week: the Swedish and the Israeli. Here, in Israel, people are interested in the effect of the coming elections on the financial market. The Marker, the most important national daily economics newspaper, published an article on this issue. The chief economist of the second largest investment house, which handles about 30 billion USD, is quoted as saying (my own translation)

“Past experience shows that most of the time, during six months after elections the stock market was at a higher level than before the elections,” emphasized Zbezinsky (the chief economist, ES). The Meitav-Dash investment house checked the performance of the TA-25 Index (the index of the largest 25 companies in the Israeli stock exchange, ES) in the last six elections. They compared the index starting from 6 months before elections up to six months after elections, and the result was that the average return is positive and equals 6%.

To support this claim, a nice graph is added:

index25

Even without understanding Hebrew, you can see the number 25 at the title, which refers to the TA-25 index, the six colored lines in the graph, where the x-axis measures the time difference from elections (in months), and the year in which each elections took place. Does this graph support the claim of the chief economist? Is his claim relevant or interesting? Some points that came up to a non-economist like me are:

  1. Six data points, this is all the guy has. And from this he concludes that “most of the time” the market increased. Well, he is right; the index increased four times and decreased only twice.
  2. Election is due 17-March-2015, which means three and a half months. In particular, taking as a baseline 6 months before election is useless; this baseline is well into the past.
  3. Some of the colored lines seem to fluctuate, suggesting that some external events, unrelated to elections, may have had an impact on the stock market, like the Intifada in 2001 or the consequences of the Lebanon war before the 2009 elections. It might be a good idea to check whether some of these events are expected to occur in the coming nine months and a half.
  4. It will also be nice to compare the performance around elections to the performance in between elections. Maybe 6% is the usual performance of the TA-25, maybe it is usually higher, and maybe it is usually lower.

I am sure that the readers will be able to find additional points that make the chief economist statement irrelevant, while others may find points that support his statement. I shudder to the thought that this guy is in charge of some of my retirement funds.