Annual Reminder: Black Friday Is No Economic Barometer

Dear readers, it is nearly time for that great November sporting event. No, not the Buffalo Bills at the Detroit Lions. Nor the New York Giants taking on the Dallas Cowboys or the New England Patriots suiting up against the Minnesota Vikings. Nor are we referring to the “other” football’s World Cup or international Test cricket. No, we are talking about the most competitive of all: Black Friday shopping. Every year, the advertised discounts flood our inboxes. And every year, some local news station grabs fresh footage of shoppers trampling each other for “doorbusters.” And every year, headlines hype it as the biggest, most telling test of America’s consumer-driven economy, and they parse the final tallies for clues. We have never been fans of this practice and have long encouraged people to downplay Black Friday. This year, we suspect it is even less useful than usual as an economic barometer.

Our typical reasons for not reading into Black Friday still stand. Though headline-grabbing, it is but 1 day of one of 12 months in a year. It has also morphed more into a season than a day: In years past, we have started seeing holiday deals early in October. That front-running has waned somewhat this year, but many discounts have still been running for over a week now, likely inspiring many folks to buy early to avoid the dreaded “sold out” placards. Discounting also runs well into December, and we have it on good authority that plenty of holiday shopping happens during that month, often with even deeper discounts than the markdowns Black Friday is reputed to feature. So if you like using the holiday season as an economic check-in, you probably have to wait for December’s retail sales figures to hit the wires in January. Perhaps that is useful in a backward-looking sense, but it will be no help in forecasting the economy, never mind forward-looking stocks. Whatever holiday demand is now, it will largely be a function of the economic conditions already in place—it will likely tell us little about how those conditions change in the future. Besides, spending on physical goods is just over one-third of consumer spending. Holiday sales won’t tell you about spending on services, which is the vast majority.

This year, holiday sales watchers will have to deal with another question: What constitutes a “good” result? Ordinarily, a modest increase over the prior year gets high marks. But the annual inflation rate is still running rather high, notching 7.7% y/y in October.^[i] Does year-over-year holiday sales growth have to top that to avoid a failing grade? Or, what about the fact toy prices are up only 3.1% over the past year while televisions are down -16.5% and book prices are flat?^[ii] Holiday shoppers may have a lot more wiggle room than headline inflation suggests.

What if consumers actually manage to buy higher volumes of goods by shopping around, trading down and hitting discount stores? An insightful Washington Post piece published last weekend delved into this, highlighting anecdotal reports from major retailers as well as local artisans. One New York jewelry maker said her order volumes are up nicely from last year, but for smaller-ticket items—think bracelets in the low three figures rather than tennis bracelets for thousands of dollars.^[iii] So, is that a good or bad year for her? If the margins are largely the same across her price range, it could very well be better. And if businesses broadly are catering to price-conscious consumers, a ho-hum total dollar sales figure could belie a strong season in terms of volumes and, potentially, earnings.

That raises another point: Retail isn’t some monolithic block. Think about all the shiny wrapped parcels you and your family exchange in any given year. There might be a videogame console, books, jewelry, clothes, a nice handbag, limited-edition basketball shoes, this year’s “it” toys, board games, electronics and—if your kids are really lucky—a microscope or rock polishing kit. Even within clothes and accessories, there might be items from major retailers and rare finds from local makers or vintage sellers. The sheer breadth of Americans’ shopping choices makes it impossible to determine winners and losers from headline tallies alone. A good year for booksellers may be a bad one for videogame makers. (Not a prediction—just a hypothetical example.) A bad year for Bullock’s or Gimbels might be a great one for boutiques or online artisans.^[iv] Or maybe that luxury purse was a (metaphorical) steal at a discount chain that sourced it for pennies on the dollar, not a top-dollar splurge at the mall. Clarity on all of this won’t come until Q4 earnings season, which arrives well into the next Q1—again, backward-looking.

But take heart, there is good news: Whatever happens this holiday season, markets are already dealing with it and probably have been for a while. That is the nature of these forward-looking beasts. They reflect economic activity well before the corresponding data hit the wires. For one rather clear-cut example, think back to February and March 2020, when stocks managed to discount the entirety of COVID lockdowns’ economic destruction before we had even one official data point attempting to measure the damage. That is amazing efficiency—it is also markets’ day job, and they are good at it.

If you rely on holiday sales to inform your economic expectations—and use that to make investing decisions—you are trading on events that stocks have already priced in. If we were analogy people, we would say something about rearview mirrors and curves on the road ahead. Black Friday and holiday sales figures are merely a backward-looking marker. An interesting sign of where we have been, perhaps, but not indicators of what comes next.