The Tel Aviv Stock Exchange has recently witnessed a rapid rebound in the past week, erasing a significant portion of the losses incurred since the outbreak of the war. Interestingly, this rebound has been accompanied by a noticeable decline in the local fear index.

The fear index, often referred to as VTA35 in Israel, is a measure of market sentiment and risk perception. It essentially quantifies the level of uncertainty and fear among investors in the stock market. This index is calculated based on the 20-day standard deviation inherent in options on the Tel Aviv 35 index. In simple terms, a higher deviation corresponds to a higher fear index, and vice versa.

During the initial days of the war, the VTA35 (fear index in Tel Aviv) witnessed an astonishing increase, more than doubling in value and peaking at around 29 points. This was the highest level recorded since March 2022, coinciding with the onset of the Russia-Ukraine war. However, as October progressed, the fear index began to gradually decline, settling at around 19 points, which represented a significant 33% drop from the record high.

A similar trend was observed in Wall Street’s fear index, known as the VIX. It experienced a notable increase of approximately 65% from the end of August to October 20, followed by a subsequent decrease of about 31%. Last week, the VIX even demonstrated an unusual pattern, with daily drops ranging from 4.8% to 8.2%.

Yaniv Pagut, the Senior Vice President of the Stock Exchange and Director of the Trading, Derivatives, and Indices Department, spoke to Globes regarding this subject. Pagut describes it as essentially a sophisticated term for standard deviation. Complex mathematical models are employed to quantify the standard deviation of the stock market, helping investors discern the level of uncertainty and fear in the market, with a higher standard deviation signifying greater apprehension and a lower standard deviation suggesting a reduction in fear.

To analyze the recent drop in both Wall Street’s and Tel Aviv’s fear indices, it is helpful to look at recent developments in the United States, where employment data published on a particular Friday led to a decreased risk of further interest rate hikes. One of the primary concerns that had been unsettling the market was the prospect of continued interest rate hikes by the Federal Reserve. However, as yields in the U.S. decreased and the stock market rallied, the fear index started to decline.

Moreover, the Israeli market is influenced by a combination of domestic and global factors. While the security situation in the region can affect market sentiment, the overarching trend is often dictated by the United States. In this particular instance, a relatively optimistic speech by Hezbollah leader Hassan Nasrallah regarding the northern arena contributed to a decrease in the fear index. This also had an impact on global energy prices, as the world closely monitors the Middle East to ensure that the conflict does not escalate.

Yaniv Pagut acknowledges that, for those not familiar with the capital market, it may seem surprising that the stock market remains relatively stable during times of conflict. However, the market tends to focus on the economic impact of such events. Historical experience has shown that after specific security incidents with limited economic significance, the market tends to stabilize.

In the case of the ongoing war, the prevailing expectation among most traders is that it will be a focused conflict with a duration of 3-4 months, according to research from the Bank of Israel. This expectation helps guide trading decisions and investor sentiment.

It is worth noting that the prompt intervention of Bank of Israel to stabilize situation has had a positive impact on the market and economy overall.

In the Israeli context, Pagut emphasizes that it’s crucial to pay attention to the debt market alongside the stock market. The bond market, which is integral for financing the war effort, can also experience volatility. While the current situation does show an increase in volatility, there is no sign of a panic-induced opening of margins.