Company / Analytics

Analytics, 25 November 2021

How Black Friday affects the stock market

Black Friday is here again. Falling on the day after Thanksgiving in the US, Black Friday signifies the start of the Christmas holiday shopping season which runs through the end of December and typically accounts for just under a fifth of U.S. total annual retail sales.

Cyber Monday is the Monday after the holiday weekend; sales during the five-day period of Thanksgiving through Cyber Monday are seen as reflective of consumer sentiment.

It is the most important retail and spending event in the United States. During Black Friday, retail stores typically open early and offer huge discounts. In 2020, 186.4 million US customers shopped online and in-store, despite disruptions caused by the pandemic.

Every holiday season, analysts make predictions about the level of sales on Black Friday, and investor confidence may be affected by whether or not those expectations are met or exceeded.

What is Black Friday?

Despite references to Black Friday tipping retailers ‘into the black’ for the year, the name has nothing to do with a company’s finances. Black Friday was first applied to shopping in 1966 when police in Philadelphia used it to describe the increased traffic and overcrowding as Christmas shopping kicked off the day after Thanksgiving.

With the Covid-19 outbreak in 2020, Black Friday saw customers flock online to avoid crowds and stay at home. But some still braved the pandemic and queued outside shops wearing masks, and even in-store Santa’s standing behind plexiglass shields.

This year’s Black Friday looks set to be even more unusual. With US inflation running at 6.2%, squeezing retailers’ margins, and production bottlenecks are leaving customers fearful of shortages. It’s unclear whether customers will return to bricks-and-mortar stores this year.

How does Black Friday affect consumer

Customers have traditionally been attracted to Black Friday sales thanks to a combination of time-limited ‘doorbuster’ discounts and holiday-themed displays. The pandemic saw online shopping soar in popularity last year – e-commerce jumped to 15% of total sales in the fourth quarter of 2020, up from 12% in the prior-year quarter.

In the US, Black Friday heralds the start of the Christmas shopping season – according to data from the National Retail Federation, there are almost 200m unique Thanksgiving weekend shoppers each year.

Consumer retail trends to dominate Black Friday sales. Leading purchases include clothing (bought by over 50% of US shoppers), toys (32%), books/movies/video games (29%), and electronics (27%). spending?

How does Black Friday affect stocks?

Black Friday sales typically last for only a weekend, but sales figures are often treated as an important indicator by investors.

Many analysts and investors scoff at the notion that Black Friday has any real predictability for either the fourth quarter or markets as a whole. Instead, they suggest that it only causes very short-term gains or losses.

Of note, the best U.S. sector from one week before to one week after Black Friday is retail. From 2007 to 2017, a grouping of S&P 500 retail stocks posted a 5% return, compared to the average 3% return for the S&P 500 over that period. For all 10 years, this basket of retail stocks has traded positively for the 10-day period. This trend continued with the S&P 500 Retailing Industry Group outperforming the S&P 500 by 1.5% and 0.1% during that period in 2018 and 2019, respectively. This pattern didn’t continue in 2020, when the S&P 500 returned 4.1% but the retailing industry group only returned 2.2%.

Black Friday indicates the strength of the economy

With consumer spending making up almost 70% of US GDP, Black Friday sales figures are sometimes viewed as a sentiment indicator of economic performance. Indeed, in times like these, only a consumer who is convinced that his job is safe will be going on a spending spree – and that is only the case if the economy is doing well. If consumption on Black Friday is low, it might be a sign that the next recession is closer than we think.

Black Friday Predicts Fourth-quarter results

Since Black Friday makes up almost 20% of total retail sales, investors sometimes use Black Friday figures as a predictor of Q4 results, which are often released the following January. Poor Black Friday sales figures can dampen hopes for a profitable quarter, decreasing demand for a company’s stock and pushing the share price down.

The Holiday Effect

The so-called ‘holiday effect’ states that the stock market tends to see higher trading volumes and returns the day before a long holiday, perhaps as investors rush to complete trades before the stock market closes. With the US stock market closed on Thanksgiving and for half a day on Black Friday, the holiday effect can drive high levels of Black Friday investing. This effect can even spread into the weeks before the holiday.

How will the stock market react to Black Friday?

Mark Hulbert, an analyst at MarketWatch, performed research that looked back to a stock market reaction during Black Fridays. Looking back at data from 1999, he noticed a strong inverse relationship between the immediate post-Thanksgiving performance of the S&P Retail Select Index (SPSIRE) and it’s run until the end of the year.

The study found that when the retail index rallies after the Black Friday weekend, it typically drops over the rest of the year (by 2%, on average). But when the market dips after the Black Friday weekend, the SPSIRE typically rises significantly (4%, on average) until the close of the year.

This effect was attributed to investors’ tendency to overreact when Black Friday sales fail to meet expectations, creating conditions for a bounceback as the end of the year approaches.

Black Friday Predictions in 2021

With the impact of Black Friday on the stock market proving unpredictable at the best of times, this year is even harder to gauge. Given the complex macroeconomic backdrop, analysts are divided on what this year’s sales figures will look like.

Mastercard anticipates that in-store retail sales growth will be up 20% on last year and that we will see 50% growth in e-commerce sales compared to 2019 levels. The National Retail Federation predicts that this year will be the highest holiday retail sales on record. This is given the considerable momentum heading into the holiday shopping season where consumers are in a very favorable position going into the last few months of the year as income is rising and household balance sheets have never been stronger.

Fears about product shortages could further boost Black Friday sales as customers look to frontload their Christmas shopping. Indeed, many consumers remained concerned about shortages at Christmas and have brought forward their spending decisions this year, a trend that could serve to boost Black Friday sales.

But with inflation at an all-time high, retailers are already feeling the pinch. It’s unclear whether customers will resume their pre-pandemic shopping habits. This year’s Black Friday might not be the retail event it once was. Deals are expected to fall versus before the pandemic with economic pressures from rising prices and a fractured supply chain translating into fewer discounts,” Scholar added.

What does Black Friday mean for investors?

Investors sometimes use Black Friday sales as an indication of a company’s health, but the truth is that there is no empirical data to back this indicator. Still, Black Friday sales can be crucial to a retailer’s annual performance.

Some of the Black Friday stocks to consider include US retail giants, Amazon, Home Depot, and Walmart which are the three biggest retail stocks by market capitalization, as of 23 November 2021.

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