What Black Friday Can Tell You About 'Sell in May' and the Santa Claus Rally

Once upon a time, we would have opened this article with a “Happy Cyber Monday!” and segued into a discussion of preliminary Black Friday retail results and why they don’t matter all that much for the economy or stocks. But times have changed. Now Black Friday is a season, doorbusters happen on Thanksgiving, and Cyber Monday has ballooned into Cyber Week. The shopping frenzy has strayed so far from its roots that Black Friday itself seems to have been one of the calmest shopping days of the year. Reporters quoted shoppers using phrases like “ghost town” and describing stores as “clean and organized” and “empty and depressing.” Then it struck us: This is just how markets work. They price in widely known information and adapt to it, sapping any advantage that once existed—and leaving it in name only. In a roundabout way, Black Friday is a metaphor for the Santa Claus Rally, Sell in May and all the other bogus seasonal investing adages.

Black Friday used to be just one day of seemingly massive discounts designed to lure shoppers on a holiday weekend. Its name came not from the occasional trauma of shoppers trampling each other, but because it was traditionally the day retailers’ profit margins moved into the black for the year. It was reliably either the day you had to be at the mall when it opened or resolved to avoid the mall like the plague because crowds and trampling. But retailers are competitive and always seeking an edge. So they started opening earlier and earlier, enticing bleary-eyed shoppers out of bed with “doorbusters.” They opened at 8 AM. Then 7. Then 6. Then 5. Then midnight. Then 8 PM on Thanksgiving Day. Then 7. Then 6. Then 5. Then they started offering “Black Friday Week” promotions the weekend before Thanksgiving. Then they gave preferred customers “early access” via special codes and coupons. The sales crept earlier and earlier in November. This year, some even started in October, to the annoyance of many who prefer holiday promotions not usurp Halloween and Thanksgiving. So much for the holiday shopping season being “shorter” due to the late Thanksgiving.

These days, Black Friday is more a state of mind than an actual thing. With deep discounts coming weeks earlier, Black Friday’s main distinction is the smorgasbord of cut-price gift sets on offer. It is no longer the one-day shopping frenzy it used to be. On the bright side, this means people are no longer physically busting down doors (or each other). We are always in favor of a reduced body count. But it also makes things a bit harder for shoppers. As The Washington Post reported: “‘It’s become a constant question of, Is this the best deal I can get, or should I wait another two weeks?’ said Tami Kim, a professor at the University of Virginia Darden School of Business.” We can empathize. About two seconds after we read that article, we opened our email, saw a bunch of retailers had cut their discounts from 25% to 30% this morning with no warning, and facepalmed in frustration.^[i]

For investors, this might all be a blessing. For too long, people seized on Black Friday as an economic bellwether. The broader and less consistent Black Friday becomes, the harder that is to do. Many stores may have had more tumbleweeds than shoppers blowing through them on Friday morning, but that says nothing about the season’s sales overall—by most reports, those are pretty darned strong. But good luck finding valid estimates of exactly how strong. It is one thing to look at one day’s sales and see how they compared to the same day a year prior. It is quite another to sift through companies’ differing promotional schedules to find their key holiday shopping season, compare that to the year before and account for timing differences. It is the sort of task that likely makes one’s eyeballs roll up into the back of their head.

But you can skip the spreadsheets and calendars, in our view. The more important lesson here is broader: The ever-expanding Black Friday illustrates how markets work. Whenever we write about seasonality, we explain that if any of these seasonal myths ever worked, it was probably short-lived. People are competitive and if an event is widely expected, they will try to position in anticipation of it. They don’t wait for the event to come. They move before it. Let us pretend that once upon a time, there was a discernible advantage to owning stocks in the week between Christmas and New Year’s—the heart of the Santa Rally—so investors lined up to buy stocks on Christmas Eve. The next year, Sally Smartypants noticed everyone buying on Christmas Eve and decided it would be a good idea to buy on the 23^rd so the Christmas Eve buyers could bid her stocks up. Seeing how well that worked for Sally, everyone would have bought on December 23^rd the following year. So Sally would have moved her buying up to the 22^nd. And then the 21^st. Then the 20^th. And on and on and on, until the Santa Rally was happening sometime in July, just as Black Friday is now in October—and is increasingly preceded by “Spring Black Friday” in April and May.

So the next time you shake your head at how early retailers are launching holiday discounts and promotions, let it be a trigger—a positive one, to remember markets work the same way.