Analysis: No, the terror wave isn't responsible for stocks crashing

Why, after nearly two weeks of rising tension, would this particular Tuesday be the day traders figured out there was something amiss?

An employee walks past a screen displaying market data at the Tel Aviv Stock Exchange (photo credit: REUTERS)
An employee walks past a screen displaying market data at the Tel Aviv Stock Exchange
(photo credit: REUTERS)
All business reporters, including myself, are guilty of it: look at the top headlines, report what the stock market, and imply a linkage.
On Tuesday, several of Israel's leading business dailies carried stories conflating the ongoing wave of terror, which claimed three more lives, and the slump in the Tel Aviv Stock Exchange. The TA-25 had dropped 1.3% in the first several hours of trading, they declared, against the backdrop of ongoing terror.
The connection is tenuous at best. In the past few months, the TASE has seen similar ups and downs on a single day several times, though most often they have to do with relevant factors such as foreign or local interest rate decisions, economic data, or stock fluctuations elsewhere. Globes, for example, linked a 1.5% drop in the TASE in late September to the US Federal Reserve Bank's decision not to raise interest rates (though the decision was widely seen as a boon to stock markets, so the reaction is puzzling).
It's certainly possible that stock traders are reacting to the attacks and unloading stocks as a result. A look at the evidence suggest that such decisions would be poorly founded.
First of all, why, after nearly two weeks of rising tension, would this particular Tuesday be the day traders figured out there was something amiss?
Second, the TASE has withstood conflicts before. Recall operation protective edge, the 7-week war last summer that saw incessant rocket-firing, military mobilization, numerous deaths, and huge international media attention. A week into the conflict, the stock market was soaring, and by the end the TA-25 had risen 1.6%.
That isn't to say that terrorism doesn't have an economic effect: it plainly does. It's just that the affected parts of the economy are not necessarily the one that affects the local stocks.
Israel's big publicly traded companies have either consistent local markets or are more dependent on foreign markets. Stabbings in Jerusalem don't stop Teva from selling generic drugs abroad. A vicious car-ramming doesn't undo the $350 million investment Israel chemicals made in China this week. The $84 million that online security company Cybereason raised in the past four months won't dissipate because tensions are high or stop them from protecting companies' IT (that one's not listed, but you get the idea). Likewise, nobody ever changed their cellular plan or cable package because of terrorism, so those companies are safe too.
Instead, terrorism hits Israel in two areas: tourism and consumption. A Bank of Israel study found that Israel's wars damage tourism for a year, before it fully recovers. That makes sense; as international news organizations broadcast the daily explosions and body counts, potential tourists  get spooked and may choose not to come. A Tourism Ministry examination this week, however, found that there had not been notable levels of cancellations since the stabbing spree began, perhaps because the story has received less coverage abroad than, say, a full-out war.
The other area that is hardest hit by terror is consumption; when people are worried about being attacked violently, they may venture out less to eat at restaurants, go to movies, and spend nights out on the town. The eerie quiet of Jerusalem's Machane Yehuda Market his week is a testament to that phenomenon. Unlike tourism, though, consumption bounces back immediately after the conflict.
All in all, BOI estimated that the 50-day war last summer cost Israel's economy NIS 3.5 billion. Roughly NIS 2 billion of that was from lost tourism, while the remaining 40% or so came from lost consumption.
Terrorism works precisely because it gets media attention and scares people. One Tel Aviv University study showed that while similar numbers of lives were lost in terrorism and car accidents in a certain period, the terror led to a 3% decrease in annual consumption, whereas the deaths from car crashed had not. Incidentally, while 7 Israelis have been killed in the last two weeks of violence, roughly twice that number die in car crashes, on average, in the same period of time.
But terrorism can leave longer lasting economic scars as well.
A report by ratings agency Moody's last week estimated that the 10 countries with the highest incidences of terror attack lost between .5% and .8% of GDP each year, with effects that last for up to five years. A large number of terrorist incidents can also hit investment and make government borrowing more expensive.
Israel, which was on that unfortunate top 10 list in the 1990s, is thankfully further down the list at present; the vast majority of recorded attacks in 2013, the last year of the study, took place in just four countries, with 25% occurring in Iraq and 19% in Pakistan alone.
The model, which takes into account the severity, lethality, and infrastructure damage caused by terror, could be applied to estimate the costs for Israel of the recent stabbings.
"For example, if I were to assume that there have been about 20 stabbings attacks killing 5 people and injuring another 10, it could potentially subtract about 0.4% to the level of GDP in the long term," said Merxe Tudela, Moody'a VP-Sr Credit Officer for Credit Policy Research, using approximations for the incidents of recent week. She also noted that the model they built estimates the cost of terrorist incidents relative to none at all, which means they may be overstated given that Israel has a frequent level of incidents. A stabbing spree in a place that never experiences terror could have a greater effect than in a place that has grown used to it.
Terrorism will always have the potential to affect Israel's economy, especially if it is prolonged and particularly lethal. But it is unlikely to be responsible for daily dips in stock prices, no matter how convenient a headline comes from the juxtaposition.