Taking Stock / Why Stocks Are Rising

Trying to explain daily fluctuations in the stock market is usually of little more than amusement value. Yet investors want the papers and pundits to explain the fluctuations, even though the explanations may seem ludicrous by the next day.

But given the national shock, distress and mourning, the speed at which the capital markets resumed their march north seems to require some explanation.

Acting Prime Minister Ehud Olmert hastened to declare Sunday that he would maintain "his" and Sharon's economic policy. Olmert's desire to claim the economic policy that was actually instituted by Benjamin Netanyahu is natural, given how well it worked.

But the markets do not care who gets the credit. The players assume that no politician would meddle with the fundamentals of economic policy, and the sense of fiscal and monetary discipline, that have ruled here for the last three years.

The governors of the Bank of Israel have managed to root out the view that the economy can grow through inflation. Now economic policy of the last few years has proven that given Israel's economic structure, budget deficits cannot generate growth or jobs, or heal poverty.

Even if bleeding-heart politicians win control of the government or the treasury, they are highly unlikely to abandon budgetary boundaries, cancel reforms or send economic policy into retreat.

It is easy to attack budgetary policy from the opposition. But in the era of open markets, the bill for rash decisions will be delivered to the government in no time.

This week, White House officials told a Yedioth Ahronoth reporter that the White House does not intervene in Israeli elections. But they promptly added that George Bush would prefer Ehud Olmert lead the government after Sharon.

That is some conflict in those two sentences. One might say that the government acted as a completely independent sovereign in disengaging from Gaza and preparing to do the same in Judea and Samaria, but the White House preferred to see a highly precise program for leaving Gaza, and Judea and Samaria as well.

In short, investors assume that America's interests in the Middle East won't be any different in the post-Sharon era. The pressure to reach an arrangement will remain.

The main question is whether an Israeli leader as esteemed and admired as Sharon can be found to pursue the project with the same fortitude and calm that Sharon managed to evince.

Never before has the Tel Aviv Stock Exchange been this interconnected with the world markets. The boom in Tel Aviv is remarkably like the trend in other emerging markets, especially in the Middle East.

Wall Street started the year with strong gains. Tech stocks rose to a four-year high on Friday. Tel Aviv investors are deeply worried about Sharon, they are hurting, but they have an eye on the international markets.

The end of the Sharon era creates great political uncertainty, but Israel's economic condition has never been better. The financial stability of the system and the banks is fine; the economy is growing strongly; the budget deficit was half what had been expected; and the balance of payments is in great condition.

The only year as good was 2000, but then the boom had been fueled by the high-tech bubble and excessive expectations of a "New Middle East". This time common sense rules, and economic growth is spread over more sectors.

Investors are optimistic by nature. The major players want the stock boom to continue. In the absence of economic or financial shocks, they will happily embrace any upbeat story in the post-Sharon era.