Investors typically overreact to widely-followed news.
You shouldn’t believe the first stories that Black Friday and Cyber Monday sales were big successes. If you want to be a brave contrarian trader, you might want to bet that retail stocks will go up for a few weeks after they go down in the two trading sessions after Thanksgiving.
The following table shows how the S&P Retail Select Index (SPSIRE -0.18%) has done since its creation in December 1999. It shows how the stock market has changed since Thanksgiving. It’s especially interesting to see how retail stocks do until Christmas if the sector falls in the first two trade days after Thanksgiving.
| S&P Retail Select Index… | Average S&P Retail Select Index subsequent gain through Christmas |
| On balance rises on Black Friday and Cyber Monday | -0.3% |
| On balance falls on Black Friday and Cyber Monday | +2.6% |
| All years since December 1999 | +0.3% |
As you can see, the differences in the table aren’t very strong statistically. This is because the S&P Retail Select Index only has 24 years of data. So, if you want to take a chance that the sector’s initial move after Thanksgiving will change direction, don’t risk too much money.
The bigger lesson for investors to learn from the market’s response to Black Friday and Cyber Monday sales is that they tend to respond to news events that a lot of people are interested in. Most of the time, the market corrects these overreactions in the weeks that follow.
This doesn’t just happen after Thanksgiving. Imagine a fund that, every month since 1926, only had the 10% of stocks that had the worst returns the month before. According to figures from Ken French, a professor at Dartmouth College, this portfolio had an annualised return of 12.8% through the end of the third quarter of 2024. The annualised return on that portfolio is 8.9 percentage points higher than a portfolio that held the 10% of stocks that had the best returns the month before.
It’s true that these results are based on made-up portfolios that didn’t have to pay any transaction costs. Those costs would make up the majority of this percentage point difference. However, these results still show that buyers tend to overreact. If you had to pick a stock that will do well in the next 30 days, the stock that lost the most value over the last month would give you a better chance of winning than the last month’s winner.
