We’re not going to cover whether Black Friday sales are worth it here. Instead, we’ll be focusing on the impact that this event can have on your investments. Because even if you don’t buy into Black Friday, it can have an impact if you invest your money in the stock market – and for good reason too, as there’s a huge increase in spending during this holiday.
What is Black Friday?
Black Friday could be referring to many things – for example, the stock market crash of September 24, 1869 – but for most people, Black Friday is talking about sales across many retailers and service providers. However, as time has gone on, this day has developed into a weekend (and sometimes even longer), with the sales continuing over the weekend and moving online for Cyber Monday.
In a typical year, this sees both brick-and-mortar stores and ecommerce have a spike in traffic and sales – boosting business and increasing consumer spending. And it’s not small amounts either – across the UK, it’s estimated that consumers will spend around £4.8billion across Black Friday and Cyber Monday.
Oh, and in case you didn't know, Black Friday immediately follows Thanksgiving which is celebrated on the last Thursday of November, so these two holidays go hand in hand!
Why does Black Friday affect the stock market?
Although there’s a lot of noise around Black Friday sales, to most investors these short-term sales and profitability figures shown by business won’t have a lasting impact. So, for example, the price of a share in a large retailer such as Walmart may go up temporarily around this period but there’s no logic to suggest that it’ll stay that way for the rest of the year.
In fact, there has been an analysis done by Market Watch, which looked at how the US’s largest retail index – the S&P retail Select Index (SPSIRE) – faired against Thanksgiving and Black Friday trends. The analysis went back to 1999 when SPSIRE was created and found that there is a strong inverse correlation between the immediate reaction of the stock market and Q4 performance.
What this means (according to the data) is that if the markets go up during Black Friday and Cyber Monday, then historically, they’ll drop for the rest of Q4. However, if markets fall during this period, this pattern is the opposite and historically, they go up for Q4.
Although the data suggests this is a trend, past performance isn’t a reliable indicator of future performance and this could be a correlation and not causation - like how the markets crash every time Oreo release a new type of stuffing! However, according to the researcher at Market Watch, they believe this pattern exists as humans have a tendency to overreact. Entering the holiday season positively brings hope and anticipation, but if that fails to materialise, we then overreact on the downside, and vice versa.
Basically, if you’re trying to use Black Friday or Thanksgiving as a measure of the market volatility or as an indicator for future stock market movements, then you may want to re-examine this decision.
How do holidays impact the stock market?
So, we’ve covered that yes, Black Friday can impact the markets, but we haven’t covered why. There are several reasons for this, and it doesn’t just impact one holiday but all of them. We’ll explain.
Just like many things in life, the stock market is subject to seasonal effects – this could be yearly, monthly, or even weekly.
The reasons for this vary and it's often perfectly clear once it’s all laid out. For example, during certain periods of the year, such as the summer holidays, you may have fewer traders active in the market, while at tax year-end you may have more. This change in the number of traders can have a positive or negative effect on the volatility of share prices.
Share prices could also change just because traders are expecting rises or dips, making these changes self-fulfilling as the price of a share is (in part) determined by how much someone is willing to pay for it.
It is important to remember, however, that seasonal stock trends don’t happen like clockwork – if at all – so it shouldn’t be the main factor in your investing decisions – especially if you’re planning for the long-term.
What could I do with my investments?
Unless you’re a day trader, any impact that Black Friday (and Thanksgiving) has on your investments should largely just be taken as part of your longer-term investment journey. Although data has shown that correlations exist in one index, they aren’t guaranteed, and may not apply across your entire portfolio.
Having a diversified portfolio means that you’ll have a lot of different types of investments, so big changes to the retail sector, for example, may not impact your investments as much as you think. For example, while Black Friday might impact retail share prices, it is unlikely to impact things like property prices.
Planning for the long-term means factoring in rises and falls along your journey, which is a natural part of investing. But if you’re struggling to decide what to invest in, or you just want managed investments that are handled by experts, then you may want to look at using a robo-investor – like Wealthify. You can open a Stocks & Shares ISA with us and invest up to £20,000 a year tax-free thanks to the annual ISA allowance, plus we’ll build you a fully diversified Plan to help reduce some of the risk.
And if you’re worried about how Black Friday could impact your investments, then our online investment dashboards make it crystal clear to see exactly how your investments are performing.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
The tax treatment depends on your individual circumstances and may be subject to change in the future.