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Holiday Effect “Thanksgiving”

„Investing is not the study of finance. It is the study of how people behave with money”

– Morgan Housel, Author of Psychology of Money

arvy’s teaser: Thanksgiving isn’t just about turkey and family – it is a powerful stock market phenomenon. Reflecting the holiday effect – short weeks, bullish sentiment and a spending spree make Thanksgiving the S&P 500’s strongest week. Embrace the cheer; markets do too.


Psychology.

It is one of the most important drivers of the stock market. Especially in the short term.

That is also why we have so many acronyms or labels for our emotional tendencies in investing. No doubt you have heard of FOMO (Fear Of Missing Out), FUD (Fear, Uncertainty, Doubt). Or the two powerful biases Hindsight (tendency to perceive past events as having been more predictable than they were) or Confirmation (tendency to search for, interpret, favor, and recall information in a way that confirms or supports one’s prior beliefs or values). Not to mention the emotions we feel at major highs or lows that translate into melt-ups or maniacs, panics and crashes.

What is still missing is another significant and long-known psychological influence, the so-called holiday effect. A popular example is the Santa Rally.

But next week we will experience the strongest one.

Thanksgiving.

Chart 1: Stock bulls enjoy their Thanksgiving turkey this year – the bear is left behind

Source: Hedgeye

Thanksgiving Agenda

Thanksgiving is deeply rooted in American culture and is considered the most important day.

Yes, for many, it is even more important than Christmas. It is always the fourth Thursday in November, so next week.

Let’s look at the Thanksgiving week agenda:

  • Wednesday: many take the day off or leave work early to travel to their families
  • Thursday, Thanksgiving Day: traditionally, a turkey is served while the family gathers around the table. The US stock market is closed
  • Black Friday: most people take the day off. Families go shopping as stores offer specials, promotions and discounts. The US stock market is only open for half a day
  • Cyber Monday: as online shopping has become increasingly popular in recent years, online stores have created Cyber Monday to participate in the shopping frenzy with special offers and discounts

This tradition and shopping spree has now also been adapted in Switzerland. Rather, it is called “Black Week” – not just one day – and consumers are looking for bargains here too. With great popularity: The largest Swiss online store, Digitec Galaxus, once reported 100 times more visitors to its website than on normal days.

Back to the US. To summarize, Americans are spending a few days off with their families and enjoying the free time with shopping, good food and leftovers over the next few days.

And that is where the holiday effect comes into play in the stock market.

Yes, your thought is right on target.

Stocks are reacting to this joy.

Chart 2: S&P 500 over the last 50 years

Source: Schaeffer’s Investment Research, 2022

Happy People = Bullish Markets

Thanksgiving week tends to be bullish. In fact, it is the best week of the year.

Oh, so you are saying that virtually no one is working, everyone is eating turkey, spending time with family and the stock market is partially closed, but it is the best week of the year?

Yes, it is!

Over the last 50 years (Charts 2 & 3), the S&P 500 has risen by an average of 0.54% this week, while it has been up 68% of the weeks. In comparison, the average weekly return for the year was only 0.16%, and the week was up only 56% of the time.

What are the reasons for this market phenomenon?

Happy people!

This is one of the main reasons for the market’s quiet upward trend. Since Americans typically only have about two weeks of vacation a year, this is a great week to recharge the batteries and spend quality time with family.

Another theory is that investors do not want to take risk this week because market activity is muted, a long weekend awaits everyone and no one is working anyway. So, they just stay put.

The third theory relates to sentiment. How strong is the consumer during Black Friday and Cyber Monday. Remember, it still accounts for 70% of GDP in the US. On these days, you get a lot of statistics and analysis from Adobe on how much was spent on goods and services.

This data is then compared to previous years and expectations and serves as a harbinger for the upcoming Christmas season.

Are the numbers good?

Then they are interpreted as a positive sign for a spending spree at the end of the year. So, the economy and the consumer are strong.

Are the numbers not so good?

Then it is not so good…

Chart 3: S&P 500 returns during Thanksgiving Week

Source: Schaeffer’s Investment Research, 2022

Theories remain theories

The theories about why the stock market is so strong during this time remain theories.

Nevertheless, there is indisputable evidence that the holiday effect, such as the Santa Rally or Thanksgiving, exists and that markets tend to be favorable during these periods.

Incidentally, the same is true for “Black Friday”. Is it called because businesses are usually no longer “in the red” as of this day of the year, or is it because shopkeepers got black hands from having to count so many bills the night after busy shopping days?

We should not focus too much on the “why” or “what” that is driving the stock market these days but accept the fact and not fight this trend.

The stock market is a world where everything is justified and argued with statistics and facts.

So, let’s allow a little magic to happen here with the holiday effect.

Happy Thanksgiving to all!

Chart 4: Happy Thanksgiving

Source: Hedgeye, added design via Canva

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