Weekly Market Commentary - Does Black Friday Mean Green for Investors?
A Black Friday for retailers does not necessarily mean a green holiday season for investors. However, stocks, particularly those of the retailers, have reflected the improving consumer incomes and balance sheets, and now sales may begin to reflect the release of pent-up demand.
This may create a positive feedback loop, supporting job and economic growth in 2013.
Does Black Friday Mean Green for Investors?
Retail sales during Thanksgiving weekend — the traditional start of the holiday shopping season — climbed 13% as more shoppers hit the stores and spent more money, according to the National Retail Federation, wildly exceeding consensus estimates. The news helped to lift stocks on Friday, making for the strongest week for stocks since early June 2012.
Retail sales matter to the stock market mainly because they reflect the health and sentiment of the consumer and investor [Figure 1], but also because they contribute to the growth of the economy and corporate profits.
Does a Black Friday for retailers assure a green holiday season for investors? Not necessarily; there have been years where positive fourth quarter retail sales did not bring positive results for the stock market. In fact, there is not even much of a relationship between how well holiday sales results fare against forecasts and stock market performance. To illustrate this point, over the past 20 years, the performance of the S&P 500 during the period from Thanksgiving through year-end was about the same (2.7% vs. 2.5%) when retailers exceeded the widely followed forecast from the National Retail Federation compared to when they were in line, on average [Figure 2].
The question of what Black Friday means for investors actually has the relationship backwards; it is instead the gain in the stock market that is the predictor for retail sales during the holiday season. This makes sense since the stock market is one of the best barometers of consumer confidence and, if it is rising, it stands to reason that consumers are feeling a bit more confident and willing to spend.
With the S&P 500 Index having gained 12% this year, it should be no surprise that early reports of sales this holiday season have been solid:
- The National Retail Federation reported Thanksgiving weekend sales up 12.8% over last year. Shoppers spent $59 billion over the weekend, with the average shopper spending $423.
- Online sales trends have been very strong, with sales estimated up 26% from last year on Black Friday. Tight inventories may have forced many to go online in search of favored styles and colors. Strong online sales have prompted shipping companies to issue solid outlooks, with UPS predicting a 6.2% increase over last year and boosting seasonal hiring by 10%. Federal Express is forecasting a gain of 12% between Thanksgiving and Christmas.
What Is Driving All This Demand From Consumers?
- A rising stock and housing market has helped consumers feel wealthier, plus the modest increase in jobs and paychecks may have given consumers the confidence to boost purchases during the holiday season.
- Consumers’ balance sheets look a lot better. The percentage of income consumed by financial obligations, such as a mortgage, rent, auto, and student loans has fallen to a level not seen since well before the financial crisis and is below the long-term, 30-year average.
- Consumers are starting to borrow again. U.S. consumer debt has fallen by about $1.3 trillion since the pre-recession peak, according to the Federal Reserve, with credit card debt being one of the most sharply contracting categories. But in four of the last six quarters, American households’ credit card borrowing has increased after having fallen for 11 consecutive quarters.
Stocks, particularly those of the retailers, have reflected the improving consumer incomes and balance sheets, and now sales may begin to reflect the release of pent-up demand. While stocks are already signaling gains in sales this holiday shopping season, the performance of retailer stocks has been pointing to solid gains with the S&P 500 Retail industry group of stocks posting a gain of 2.4% relative to the decline of -1.8% in the S&P 500 so far during the fourth quarter.
However, one weekend does not make a season. Stocks have slumped so far in the fourth quarter, and retail sales have yet to break out of their slump. The widely watched weekly measure of retail sales from the International Council of Shopping Centers has averaged a relatively consistent year-over-year gain of 2 – 3.5% during the second half of 2012. If sales do begin to accelerate, it may be good news for the economy. A more confident consumer leads to more confidence in corporate America, which may lead to brighter prospects for job and economic growth in 2013.
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