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Black Friday – the name given to the first day after Thanksgiving – is one of the most important retail and spending events in the United States. Every holiday season, prognosticators make predictions about the level of sales on Black Friday, and investor confidence may be affected by whether or not those expectations are met.

If consumers follow up Thanksgiving by spending a lot of money on Black Friday – and retailers show strong numbers – then investors might have their first indication that it is shaping up to be a particularly profitable shopping season. This confidence is reflected in the stock market. In this manner, Black Friday could be considered a leading indicator for the markets.

Conversely, many take it as a sign of trouble if retailers are unable to meet expectations on Black Friday. Concern over the health of the economy is magnified if consumers are perceived to be saving too much. This can cause the stock market to suffer.

Understanding Thanksgiving and Black Friday

Thanksgiving is an important day for a lot of businesses, particularly those in the food industry. However, stock market trading is unlikely to be affected by Thanksgiving alone because of the importance of the day after.

Black Friday is important because this is the shopping day on which many retailers have traditionally made enough sales to put them in the black for the year. Since many retailers consider Black Friday to be crucial to their business's annual performance, investors look at Black Friday sales numbers as a way to gauge the overall health of the entire retail industry. Economists, based on the Keynesian assumption that spending drives economic activity, view lower Black Friday numbers as an indication of slowed growth.

According to the research conducted by National Retail Federation, in 2016 holiday sales have the potential to increase by 3.6% and shoppers plan to spend approximately $655.8 billion.

The stock market can be affected by having extra days off for Thanksgiving or Christmas. The markets tend to see increased trading activity and higher returns the day before a holiday or a long weekend, a phenomenon known as the holiday effect or the weekend effect. Many traders look to capitalize on these seasonal effects.

Black Friday and the Stock Market

Many analysts and investors scoff at the notion that Black Friday has any real Q4 predictability for the markets as a whole. Instead, they suggest that it only causes very short-term gains or losses.

A 2008 Market Watch analysis performed by Mark Hulbert 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.

Thanksgiving and Black Friday can have major short-term trading implications on Wall Street, but their long-term stock market effects remain uncertain.

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