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How to factor black Friday into your investment strategy

How to factor black Friday into your investment strategy
November 20
10:59 2017

Here’s some advice for investors who later this week would otherwise be paying close attention to the success of retailers’ Black Friday sales:

Fuhgettaboutit.

That’s because we learn next to nothing about how the economy is really doing from the initial reports of how retailers fared on Black Friday.

At least since the 1930s, the day after Thanksgiving has been considered the beginning of the Christmas shopping season. Since at least the 1960s it has been referred to as “Black Friday.” In recent years, as much as one quarter of the total annual sales of the typical U.S. retailer occur in the four-week period between then and Christmas.

Given this outsized importance of the holiday shopping season and the role consumer expenditures play in the overall economy, you’d think it would be crucial for investors to keep close tabs on how the season is kicking off. But the data tell another story.

Consider the stock market’s performance over the two trading days after Thanksgiving—Black Friday and the subsequent Monday. (This Monday in recent years has come to be known as Cyber Monday, reflecting the growing proportion of holiday sales made online.) By the end of Monday’s session, of course, investors will have had access to retailers’ initial estimates of their Black Friday sales volumes. If those estimates are particularly rosy, the stock market typically finishes that Monday higher than where it stood before Turkey Day—and vice versa.

Yet, more often than not, the stock market reverses that two-day trend and does just the opposite through the end of the year. A particularly stark illustration of this trend reversal came in November and December of 2008, during the dark days of the financial crisis. Initial reports were that retailers’ Black Friday and Cyber Monday sales were particularly disappointing, and the Dow plunged by 6.6% over those two days. Nevertheless, from then through the end of the year, the Dow rose 7.7%.

Not every year has seen such significant trend reversals. But in those years since the early 1930’s in which that two-day trend was down, the Dow Jones industrial average  gained 2.1% from then until New Year’s, on average. That contrasts with a gain of 1.7% when the stock market rose over the two days following Thanksgiving.

To be sure, a 0.4 percentage point difference is not very large. But no one is suggesting that you actually become more bullish if the initial Black Friday retail reports are disappointing. The investment implication of the data is instead that you should simply ignore those reports.

If you nevertheless insist on making a short-term trade around Thanksgiving, the bet that enjoys the strongest statistical support is that the stock market will be higher at the end of the first week of December than where it stands on the Monday before Thanksgiving. This two-week period represents the confluence of two seasonal patterns that researchers have detected in the historical record: Strength over the two trading sessions prior to an exchange holiday, and strength around the turn of the month.

Over the last century, for example, the stock market has risen about two-thirds of the time over these two weeks. That’s markedly better than the 54% odds of rising that prevail for all other comparable periods of the calendar.

Notice carefully, however, that this means stocks still fall one out of three times over these pre- and post-Thanksgiving sessions. For most investors, therefore, the best advice is to focus on buying and holding good quality stocks for the long term—and enjoying Thanksgiving dinner without worrying about the stock market’s short-term gyrations.

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