Will the Black Friday bulls be right?

One crucial question hangs over Black Friday, the busiest day of the year for U.S retailers: Are consumers as pessimistic as they say they are, or as optimistic as their recent behaviour suggests?

Over the past few months, Americans have repeatedly declared to pollsters that they are downcast about the state of the economy, but they keep spending nonetheless. This Friday will provide a key test of whether a rocky recovery finally will put a lid on consumer expenditures – and the retailing stocks that depend on those outlays.

"There's a disconnect between spending and confidence," Sal Guatieri, vice-president and senior economist for BMO Nesbitt Burns, said in an interview. "It's a good thing that American consumers are not spending the way they feel, or we'd be back in recession."

U.S. retailers have been above-average performers on the S&P 500 this year, despite high unemployment and a lacklustre economy. Black Friday, as the day after U.S. Thanksgiving is known, will provide the first clues as to whether more gains lie ahead.

Retailing stocks, as a group, are trading at price-to-earnings ratios above the broad market, suggesting optimism about the resilience of the U.S. consumer. Forecasts call for a strong Black Friday, with 33 per cent of Americans indicating they definitely plan to hit the stores, up from 27 per cent last year.

U.S. retail sales have edged up this year despite the economic headwinds and Mr. Guatieri expects spending growth to continue at about a 2-per-cent pace in the holiday season. "There is a lot of pent-up demand for discretionary items, which means we might see a better holiday season for retailers of non-essential products, such as games. However, demand for big ticket items, such as furniture, is likely to remain soft given Americans' ongoing focus on debt repayment."

Retailers are opening early to lure customers, and forecasts for warm, dry weather this year will encourage millions of people to line up through the night after Thanksgiving dinner to be the first through the door when business begins.

Kohl's Corp., Macy's Inc. and Target Corp. plan to open some locations at midnight on Friday, and Wal-Mart will open at 10 p.m. on Thursday. "Conversely, we believe that J.C. Penney Co. will be at a competitive disadvantage as it plans on opening at 4 a.m.," Deborah Weinswig, an analyst at Citigroup Inc., said in a research report previewing Black Friday.

Among the stocks in the spotlight will be Amazon.com Inc. The world's biggest online retailer trades at 101 times earnings, and its shares rose to a record last month on optimism that its new Kindle tablet, a low-priced rival to the Apple iPad, will lead to higher profit. The company is already offering an array of Black Friday discounts.

If Amazon is the current star of U.S. retailing, Sears Holdings Corp. is the dog. Last week, the department store reported its 19th consecutive quarter of declining sales. The stock has dropped 15.6 per cent this year and has one of the lowest investment recommendations among retailing analysts. But that means the shares could be sensitive to any sales numbers from Black Friday that signal a turnaround.

One of the themes that investors will be watching is whether luxury goods retailers will be able to sail through a turbulent economy."I think what we're seeing is a bifurcated market, or a bifurcated consumer, where people with jobs and wealthy people are still spending, but those who are out a job or can't find one or because of the 9-per-cent unemployment rate are spending very cautiously," Mr. Guatieri said.

Tiffany & Co. , the world's No. 2 retailer of high-end jewelry, surprised investors in August by raising its full-year earnings forecast, bolstering the view that demand for high-end products will weather the economic slump. The stock has gained 15.6 per cent this year, and analysts remain optimistic.

Wal-Mart Stores Inc. is at the opposite end of the retailing spectrum. The company has been sacrificing profitability at U.S. stores by lowering prices to attract its largely blue-collar clientele. At 12.7 times earnings, the stock trades slightly below its own five-year average, and roughly in line with the S&P 500.

Black Friday's results will resonate beyond the retailing sector, as economists look to them for signals as to the health of the U.S. consumer. "The retailers are early-cycle stocks," said Bernard Sosnick of Gilford Securities Inc. in New York. "It's because consumers are always looked at as drivers of the economy."