Tel Aviv Blue Chips Lose 3.3% More

The world learned that the European Central Bank apparently won't be lowering euro-zone interest rates after all.

Tel Aviv stocks tumbled on huge turnover, losing well over 3% of their value in especially choppy trading. But in fact, share prices had clawed back some ground from their lowest point at midday, even though the world learned that the European Central Bank apparently won't be lowering euro-zone interest rates after all. That signal sent European stocks reeling, and Tel Aviv shares in their wake.

What ECB President Jean-Claude Trichet actually said yesterday was: "In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets." Interest rates matter because cutting them should stimulate the economy. It's cheaper for companies to borrow more to expand, people can borrow for their sundry needs, and so on. And it's good for stocks because the lower the prevailing interest rate, the lower the returns on "risk-free" assets such as government bonds. Investors hungry for returns then turn to stocks. But Trichet dampened hopes of that scenario, at least starting with the ECB.

Although nothing's a certainty until it's over and done with, there is a widening consensus that recession - American, global - is inevitable. The U.S. Federal Reserve's jolt to the markets, with its unscheduled and extreme 0.75% cut to its key funds rate, perhaps halted the slide in asset prices for a bit as investors digested the move. But this effect didn't last. If anything, the Fed's jolt may have sent a message it didn't intend - that its chiefs were alarmed.

Over here, trade was more volatile than ever. The TA-25 index of blue chips started yesterday with a gain of more than 1%, and the mood seemed cheery enough. Asian stocks were also forging ahead, rising by around 5%. The Real Estate-15 index even started with a 2% leap.

But the rally couldn't hold, and by mid-session the TA-25 index was losing 5%. Ultimately the index rebounded a bit to close 3.3% lower at 1,065 points, its lowest level in four months. From the year's start it has lost 12.5%.

The TA-100 index, also a large-cap index, tumbled 3% to close below 1,000 points. The last time it sank that low was in April 2007. From January 1, the TA-100 index has dropped 13.6%. Total turnover in shares was very heavy at NIS 3.2 billion, attesting to the sense of stress in the market.

Major stocks lost a lot of ground, despite the late reversal. Teva Pharmaceutical, the biggest generic drug company in the world, tumbled 5% after losing 5% the day before. Chemicals company Makhteshim Agan retreated by 3.7% and Israel Chemicals fell 2%.

Real estate companies were not spared the storm: Lev Leviev's Africa Israel tumbled 4.7% and Gazit Globe dropped 3%. Nor were the banks a safe haven yesterday: Hapoalim fell 4.8% and Leumi lost 3.1%.

Things must be seen in proportion, though. Stock markets have known crashes before and soldiered on, and Tel Aviv has had its travails. Remember the bank-shares manipulation scandal of 1982, which sent the Tel Aviv Stock Exchange into free fall? That soured the public on the exchange for years; to this day many won't touch the market with a dhow pole.

The bank-shares scandal may have caused national trauma, but the fact is that on the 25-year chart it's a tiny blip, almost indiscernable. The following years of gains make the crash of 1982-1983 pale into insignificance. The same goes for the crash of 1994: It was followed by steep gains.

As they happen, crashes are horrible, but proportion returns over time. These downturns, which happen once in a while, are simply a correction in the very noisy chart of the stock market. Asset prices tend to overreact, on the upside and downside; they rise too high and then fall too hard. But all in all, over the years, the trend is up.

From 1980 the Israeli stock exchange has crashed four times: the bank shares, the 1987 Wall Street nosedive, the 1994 implosion and the second-intifada crash of 2001. Yet Tel Aviv's general trend has been upward, and impressive to boot. From 1980 to date, Israeli stocks have returned 10%, in real, not nominal terms. That's a reward several times greater than any other investment reliably returned.