As part of our quarterly theme of Financial Markets and Risk we’re looking at current financial trends, hearing from finance academics and giving insights into banking. A recent retail phenomenon is Black Friday. Stemming from the U.S.A., the day after Thanksgiving sees thousands of shoppers hit retailers in their masses scrambling for cut-priced bargains ahead of the Christmas season. We asked Kent Business School Lecturer in Finance Dr. Antonis Alexandridis to examine whether the stock markets are affected by this worldwide craze.
This Friday is Black Friday, the day that follows Thanksgiving and the busiest retail shopping day of the year. Black Friday is the day that retailers are supposed to be ‘in the black’ for the year after presumably stocking up on inventory in the earlier months. Department stores offer their biggest discounts and consumers line up before dawn to be the first in when doors open. According to the research conducted by the National Retail Federation, in 2016 holiday sales have the potential to increase by 3.6% and shoppers plan to spend approximately $655.8 billion.
Although Black Friday is a real treat for consumers, investors and traders should pay close attention also. It is believed that Black Friday can predict the direction of the market for the rest of the year and either boost stock prices or cause panic.
Stock Investors and Black Friday
Black Friday is considered by retailers to be an indicator of their business’s annual performance. Consequently, investors examine the sale numbers and try to infer the health of the retail industry. Investors’ confidence may be affected by whether or not sales expectations are met. Based on the Keynesian assumption that spending drives economic activity, if consumers spend a lot of money on Black Friday and retailers show a strong number of sales, investors have a first indication of an expanding economy and a profitable shopping season.
This can be reflected in the market and it is assumed that Black Friday could be considered a leading indicator for the markets. On the other hand, reduced sales is interpreted that consumers prefer to save indicating a concern over the economy.
Sounds exciting, is it also True?
Occasionally, Black Friday has a temporary effect on the stock market. For example, in 2011, the DJIA increased almost 300 points on the following Monday after retailers reported stronger-than-expected sales. However, there are investors who believe that Black Friday does not have any real predictability for the market as a whole, but rather causes very short-term gains or losses.
Mark Hulbert, a Market Watch analyst, performed a study in 2008 and looked at a 114-year sample on stock market performance following Thanksgiving and throughout the rest of the calendar year. He concluded that there was no correlation between a Black Friday bump and Q4 performance. 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.
There are other considerations when looking Black Friday as a leading indicator for the markets. First, at one time there was very little price discounting for the holidays; now it’s pervasive. Also, ‘Cyber Monday’ – the Monday after Black Friday – is becoming and equally important benchmark. There is an increasing number of people who prefer to place their orders online on Monday, rather than lining up on Friday. Finally, adverse weather conditions can have a negative impact, as less people will be willing to wait in the line.
Thanksgiving and Black Friday can have major short-term trading implications on Wall Street, but their long-term stock market effects remain uncertain. 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.
Many thanks to Antonis for sharing his thoughts. Antonis currently teaches on a number of postgraduate courses at Kent Business School, at the University of Kent including MSc in Finance, MSc in Finance and Management, MSc in Finance, Investment and Risk, MSc in International Accounting and Finance and MSc in International Banking and Finance.
He holds a PhD in Finance from the Department of Accounting and Finance at the University of Macedonia, Greece.
His research interests have always been closely related to weather risk management, to modelling and pricing of financial derivatives and to Artificial Intelligence and Financial Engineering.
He has published 2 books in Weather Risk Management and in Wavelet Neural Networks.