What Happens To The Stock Market During The Holidays?

By: Michael Flannelly · November 21, 2022 · Reading Time: 6 minutes

During the holiday season, the activities and schedules of Americans tend to change as people increase their shopping and take time off to gather with friends and family to celebrate. And the quirks of the holidays impact the financial industry too, as many investors leave work behind to take an extended break from typical trading routines and analyzing the markets.

Some investors see the time between Thanksgiving and New Year’s Day as a time to relax and recharge. In contrast, many traders see the season as one where they can work hard and make some strategic gains in the market, perhaps taking advantage of the period when many other traders take time off. Here’s a look at how the holiday season can affect the stock market, which can help you navigate the season no matter what kind of investor you are.

Stock Trading Volume and the Holiday Season

There is generally lower stock trading volume during the holiday season, as both professional and retail traders take time off from the markets. But that doesn’t mean there is no trading activity. And since fewer traders participate in the markets, stock prices can be more volatile than usual because there are fewer buyers and sellers to ensure liquidity.

For traders interested in making short-term gains during the holidays, this increased stock volatility may present potential opportunities to take advantage of market fluctuations.

And just because stock trading volume is lower doesn’t mean the market is completely quiet. If there’s political or economic news, it can still move stocks; paying attention to news events during the holidays may help you take advantage of subsequent price movements.

The Holiday Effect

Some traders may be interested in the holiday effect (sometimes called the pre-holiday effect), a supposed phenomenon that sees stock prices drop in the days leading up to a holiday and then rebound on the trading day right before the holiday. Proponents of this pattern say it is most commonly seen around Thanksgiving and Christmas, but can also happen around other holidays.

There are a few theories as to why the holiday effect may occur. One view is that many people take time off around holidays, so there are fewer traders in the market, and it exacerbates market fluctuations, as mentioned above. Another theory is that holidays tend to be associated with family and relaxation, which may make people more risk-averse and less likely to buy stocks.

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The holiday effect is one of several market anomalies, called calendar effects, that traders may try to exploit to make gains. However, the holiday effect and other calendar effects, like the January Effect, are not hard-and-fast rules that predict the movement of stock prices; just because this phenomenon has happened before does not mean it will occur before every holiday. Generally, calendar effects are a psychological tool traders may use to influence decisions, but they should not be the main reason a trader makes investment decisions.

Still, the holiday effect is something that traders should be aware of; if you’re planning on buying or selling stocks around a holiday, it’s important to keep this phenomenon in mind.

Thanksgiving and Black Friday Stock Market Trends

For both traders and long-term investors, the shopping period from Thanksgiving to Cyber Monday (the Monday following Thanksgiving) can play an essential role in the market and the broader economy. This period is typically considered the most significant retail spending extravaganza of the year in the United States — and investor confidence can hinge on whether or not spending predictions made were met or exceeded. These retail sales can be an important economic indicator.

If Black Friday weekend results are good, it could lead to a spike in retail stock prices. When results come in below expectations, concerns can arise that consumers are tightening their wallets, which can negatively impact the stock market.

The actual Thanksgiving Day and Black Friday effect on stocks isn’t instantly apparent, since the stock market is closed on Thanksgiving Day and is only open until 1 pm on Black Friday.

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But, when stock market activity returns to regular hours after the Thanksgiving weekend, large numbers of investors will look at sales numbers to determine the health of the country’s retail industry and perhaps adjust their buying and selling strategies accordingly.

But investors can’t always expect Black Friday performances to predict how the retail stocks or the stock market will react when it reopens. In 2021, for example, the National Retail Federation (NRF) estimated that 179.8 million people shopped, either online or in stores, during the five-day holiday period from Thanksgiving through Cyber Monday. This beat the initial estimates by more than 21 million. However, the S&P Retail Select Index (SPSIRE) declined 6.9% the week following the holiday, while the S&P 500 fell 2.5%.

Nonetheless, paying attention to the retail sales following Thanksgiving weekend can help investors gauge the strength of the consumer during the holiday season, which may be reflected in stock prices for the rest of the year.

The Takeaway

If you’re planning to do any holiday trading, be sure to approach it with caution. Though there can be opportunities to make money during the holidays, it can be a tricky time to trade stocks. And if you’re not comfortable with the level of volatility, it may be best to sit on the sidelines. Remember, there will always be another opportunity to trade.

For long-term investors, the holiday season may be a better time to rebalance your portfolio by the end of the year rather than look for trading opportunities to make short-term gains.

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