How Does Black Friday Affect the Markets?

After being closed yesterday, US markets will have a shortened trading session today. But a further distortion could come from many of the big traders deciding that coming into the office for half a day isn’t worth it, and taking the long weekend.

Usually, this means there is less liquidity in the market, meaning you can have some increased volatility.

It used to be that Black Friday was an exclusively US market phenomenon. But all around the world, the retail aspect, at least for advertising purposes, has become an established event. And the online version – Cyber Monday – is also having an increased impact.

But, is it enough to affect the markets?

Like all things involving the markets, it’s complicated

Some economists argue that Black Friday can be an important indicator of the US economic outlook.

Generally, they rely on supply-side considerations, particularly focusing on how the level of retail sales over the period can be an indicator of how much Americans are willing to spend.

By extension, other countries that have Black Friday events where retail sales are expected to increase might follow a similar pattern.

If sales beat expectations, then the theory goes that consumers are likely to keep driving the economy. That would imply an improvement in the stock market. As a result, it would also mean a shift away from safe havens in forex over the rest of the quarter.

On the other hand, if sales underperform, it could be a sign that the economy is weaker than anticipated, and we could see the market drifting lower through the rest of the year.

Not everyone agrees

Other analysts dissent, pointing to there not being a clear correlation between retail sales data from Thanksgiving and market performance afterward.

There are, most likely, more factors at play, even if you agree with the more Keynesian theory that consumers drive the market. We could explain part of it as the market running up ahead of Thanksgiving in anticipation of better news, and simply adjusting to the results afterward.

Regardless of which group is right, this time, traders are likely to be paying more attention to the results of Black Friday and Cyber Monday sales.

Last year saw the first decline in sales in more than a decade because of covid. A return to normal performance in retail could help reassure many that the economy is getting past the pandemic, and traditional dynamics are reasserting themselves.

How does the market behave?

Thanksgiving sales are all about retail. Therefore, it’s not surprising that the retail sector tends to outperform the benchmark S&P500 in the ten days after the holiday.

There does seem to be a stronger correlation with the retail sector than the broader stock market, as one might expect. On the other hand, gold also tends to underperform. And given the explosive rise of crypto over the last year, it’s an open question how it will react.

Last year was the first time that the retail sector underperformed the S&P500 following Black Friday. However, this was mostly because of the impact of covid.

Should the markets return to retail beating the benchmark, it might help provide some relief across the board that things are returning to normal.

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