This Thursday is Thanksgiving. But the real feast for investors and traders comes the following day. Strong retail performance on “Black Friday” could boost stock prices and predict the direction of the market for the rest of the year. But unexpectedly weak sales might cause a panic—proving that consumer confidence and the underlying economy is not that strong, and giving retail traders an excuse to bail out of an overheated stock market. Sounds exciting, but it is not necessarily true!
Black Friday—the day after Thanksgiving—is traditionally the busiest retail shopping day of the year. Department stores pack Thanksgiving papers with inserts, they advertise with flyers, TV and the web, and shoppers line up before dawn the next day to capitalize on the “door busters”. Black Friday is also the day that retailers are supposed to turn “in the black” for the year after presumably stocking up on inventory in the earlier months.
The second tradition is clearly obsolete: with just-in-time inventory management, no retailer could afford to wait 11 months to turn profitable. But it is indeed the “busiest day of the year”, if you believe Wikipedia: since 2003, every Black Friday except one has indeed seen higher retail sales volume than any other date. Of course, this may be a self-fulfilling prophecy since stores have longer opening hours on that day and offer their biggest discounts and loss leaders.
Black Friday has occasionally had a temporary effect on the stock market. In 2011, the DJIA increased almost 300 points on the following Monday after retailers reported stronger-than-expected sales. However, financial newsletter writer Mark Hulbert did an analysis of 114 years of market activity in which he tracked the correlation between market performance on the Friday and Monday after Thanksgiving and the balance of the year, and found… no correlation.
In fact, in recent years the market had performed exactly the opposite of the Friday/Monday reading. When stocks were up on those days, they were typically down till the end of the year and vice versa. (This is through 2008, when Hulbert’s article was written.)
There are other considerations when looking Black Friday as a leading indicator for the markets. At one time there was very little price discounting for the holidays; now it’s pervasive. So a strong sales performance on that day may have very little bearing on a retailer’s profitability. Also, “Cyber Monday” on the Monday after Thanksgiving is becoming an equally important benchmark. If people can’t go shopping on Friday (or prefer not to battle the crowds), they increasingly place online orders on Monday when they return to work. Weather can also have an impact: if it’s terrible, more people may stay home.
So for traders looking for clues as to where the market is headed, Black Friday may not offer the best set of tea leaves. A strong or weak Black Friday performance may be a confirming factor, or it may be an outlier, but it doesn’t have the ability to change the direction of the market by itself. You’re probably better off with the supply and demand trading strategy taught at Online Trading Academy, which allows traders and investors to anticipate market turns with a high degree of accuracy.