How does Black Friday affect stocks?
Last year’s Black Friday saw customers flock online as the Covid-19 pandemic encouraged shoppers to avoid crowds and stay at home. Those that did brave the shops queued outside wearing masks, with even in-store Santas standing behind plexiglass shields.
And Black Friday 2021 looks set to be even more unusual. US inflation is running at 6.2%, squeezing retailers’ margins. Production bottlenecks are leaving customers fearful of shortages. It’s unclear whether customers will return to bricks-and-mortar stores this year.
With analysts split on their Black Friday predictions, what could this mean for the stock market?
What is Black Friday?
Falling the day after Thanksgiving in the US, Black Friday heralds the start of the Christmas shopping season. Retail stores typically open early and offer huge discounts. In 2020, 186.4 million US customers shopped online and in store, in spite of disruption caused by the pandemic.
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.
Since 2005, Black Friday has been followed by Cyber Monday, the online equivalent of bricks-and-mortar Black Friday sales.
How does Black Friday affect consumer spending?
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 tends 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%).
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.
With consumer spending making up almost 70% of US GDP, Black Friday sales figures are sometimes viewed as a sentiment indicator.
Frank Hausler, Chief Strategist at Vontobel Asset Management explains:
Fourth-quarter results predictor
Because 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 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. Speaking exclusively to Capital.com, Victoria Scholar, Head of Investment at Interactive Investor, explained that “this week could see choppier-than-normal price action in US equity markets amid lighter volumes around the Thanksgiving holiday”.
Higher levels of optimism and ‘holiday spirit’ are also hypothesised to drive price increases, although there is no empirical evidence to support this.
Historical market behaviour in the Black Friday period
In theory, we might expect Black Friday to impact the share market, but what does the evidence say about how the stock market is affected by Black Friday?
According to seasonality screener, Seasonax, the S&P 500 showed strong seasonal returns between 20 November and 6 December (the period covering the Thanksgiving weekend) between 2001 and 2020. However, these were typically short lived, with the index falling immediately after.
Mark Hulbert, an analyst at MarketWatch, performed research that sheds more light on this. Looking back to 1999, he noticed a strong inverse relationship between immediate post-Thanksgiving performance of the S&P Retail Select Index (SPSIRE) and its run until the end of the year.
In other words, 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.
Hulbert explains that investors overreact when Black Friday sales fail to meet expectations, creating conditions for a bounceback as the end of the year approaches.
Black Friday 2021 predictions
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.
According to Interactive Investor’s Scholar, fears about product shortages could boost Black Friday sales as customers look to frontload their Christmas shopping.
Shay remains optimistic, despite these concerns.“Retailers are making significant investments in their supply chains and spending heavily to ensure they have products on their shelves to meet this time of exceptional consumer demand,” he added.
Further uncertainties remain. With inflation at 6.2%, retailers are already feeling the pinch. It’s unclear whether customers will resume their pre-pandemic shopping habits.
“Black Friday is not 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.
“On top of that there has been an increase in climate consciousness after Cop26, with most of us trying to consume fewer cheap goods, particularly clothes that we don’t always need.”
Amid this uncertainty, a recent note by JP Morgan Asset Management provided a word of caution for investors:
Black Friday sales can be crucial to a retailer’s annual performance, but they are not a failsafe way of gauging the health of a sector.
Black Friday stocks to buy
US retail giants, Amazon, Home Depot and Walmart are the three biggest retail stocks by market capitalization, as of 23 November 2021.
Standing to gain from a bumper Thanksgiving weekend, these could be the Black Friday stocks to watch – but can they navigate the tough economic climate?
Third-quarter net sales were up 15% on the prior year quarter, but will this make retail sales on Black Friday and Cyber Monday more muted?
Last year’s pandemic-induced retail disruption forced Home Depot (NYSE: HD) to change its traditional Black Friday deals. The company offered an extended Black Friday Season, with savings available throughout November and December, both in store and online.
Fourth-quarter sales for 2020 were up 21.5% on the prior year quarter, despite the challenging environment. This year, Home Depot have again opted to extend their Black Friday event to cover a longer period.
Unlike Amazon, Walmart (NYSE: WMT) didn’t kick off Black Friday sales early this year, but this didn’t seem to harm third-quarter results, which were published on 16 November. Net sales were up 4.1% on the prior year quarter.
Speaking on an earnings call, John Fumer, Walmart’s CEO, was optimistic about international supply chain disruptions as two-thirds of Walmart’s inventory are sourced locally from the United States.
Does Black Friday affect the stock market?
Black Friday sales may typically only last a weekend, but sales figures are often treated as important indicators by investors. Encouraging results may suggest high consumer confidence, which could be seen as a positive signal for the retailer and the economy, serving to raise share prices. However, empirical evidence does not always support this.
What does Black Friday mean for stocks?
Empirical evidence suggests that strong Black Friday sales figures don’t always mean strong share price performance. Research by Mark Hulber at MarketWatch showed that if the S&P Retail Select Index dipped after Black Friday, it typically performed well for the rest of the year.