The holidays are synonymous with joy, celebration, and festivity. It’s a time to get together with our loved ones, reflect on our lives, and give thanks. But what does it mean for the economy? Sure we spend more than usual but how does it impact the economy overall? The holidays in general also bring a cheer to the economy. There’s an increase in spending, a boost in manufacturing, seasonal job creation, and overall better economic statistics are seen. Let’s take a closer look.
Impact on Retail Spending
Trade and commerce in the US gets a boost during the holiday season traditionally. It’s considered to be the most important time of the year for retailers because sales during the holidays make up 20% of the total retail sales in the country. In 2016 over $22 billion were reported in sales from retail stores and over $60 billion in online sales. Toy manufacturing generated over 6000 jobs in America.
Consumer spending is closely related with the rate of employment and unemployment. Holiday sales have experienced an annual growth between 3.2-4.2% in the last five years.
Whether the holiday spending increases by a large factor or remains more conservative, one prominent trend is the rise in online sales in recent years.
Impact on Financial Markets
Stock markets tend to experience seasonal ups and downs throughout the year. The holidays can be financially tough and it also reflects on the stock market. The market can be more volatile around various national holidays. Stock prices often increase around the Thanksgiving weekend due to Black Friday shopping. But is there a stock market trend around December holidays? Let’s see.
If we consider trading volume over the holiday season, it’s generally lower than the rest of the year. This decline is simply due to the fact that people trade stocks much less during this time of the year. It’s a busy time of the year, many people go out of town to meet family and friends, and the general focus is away from trading. Low trading volume results in lower liquidity so many hesitate to trade. However, with careful planning it would be a good time to make some gains if you’re so inclined.
In addition to holiday sales, the stock market is impacted by politics, consumer sentiment, and consumer confidence in the economy. The stock markets experience certain holiday trends that continue to repeat year after year.
- The pre-holiday effect
Stock exchange experiences a curious trend known as the Pre-Holiday effect. Stock prices go up on the day before a major holiday. It’s common to stock exchanges around the world. No one knows for sure why the pre-holiday effect occurs but theories suggest a number of different reasons from decreased liquidity to a general increase in optimism and happiness. According to one study returns increase 9-14 times on the day before a stock market holiday.
- End of year effect
Similar to the end of quarter effect, the end of year effect happens because portfolio managers rebalance portfolios at the end of the year and want to close the year on a positive note. This leads to a surge in trading at the end of the year and especially on New Year’s Eve.
- The January effect
The stock market performance in January is supposed to impact the rest of the year. A strong start in January with steady prices will indicate a prosperous year. Similarly a volatile beginning in January will point to a volatile year overall. The January effect refers to the perceived increase in stock prices during January. The boost in prices is associated with stock selling in December followed by buying in January. Investors sell low performing stocks at the end of the year and buy them back in early January. It’s also common to use cash bonuses to make investments early in the year.
The same factors that impact consumer spending as discussed in the previous section are also likely to have an impact on the stock markets. Whether you’re an investor or an entrepreneur, being aware of seasonal and holiday related impacts on the economy can help you plan your personal investment and business strategy to make smarter choices.
