With the global economy on shaky ground, American consumers have once again begun to retreat. Issues from Europe's continuing debt debacle to the recent poor jobs report has sent consumer confidence downwards to levels not seen since January of this year. Industry group, The Conference Board recently reported its latest index of consumer attitudes had fallen to 64.9 from the previous months' 68.7. Analysts had been expecting a gain to 70. To that end, investors have once again fled from discretionary names and funds like the First Trust Consumer Discretionary AlphaDEX ETF (ARCA:FXD). However, not all of the consumer discretionary names should be thrown away. For those firms who operate in the near-luxury sector, the time could be right to buy.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Upgrading Your Lipstick
With the consumers in the United States once again feeling glum about their prospects, now could be good time to bet on the aspirational or accessible luxury brand purveyors. Analysts point to an economic indicator called the "lipstick effect." The theory, which has been proven almost true with every economic recession, basically states that when economic times are tough, consumers stop spending on big ticket items, and actually increase their spending on smaller indulgences. Consumers can't or don't want to purchase new homes, cars and the like when they're unsure about their financial security. However, the same consumers turn to less expensive extravagances, such as lipstick, when they feel less than confident about the future. People don't want to feel deprived, so they seek solace in smaller "treats."

As consumer confidence numbers have drifted lower, analysts expect the lipstick effect to once again make itself known. Already, some near-luxury brands Steven Madden (Nasdaq:SHOO) have reported better than expected earnings in the difficult consumer environment. All of this means that now may be the time for investors to pounce on stocks that own accessible luxury brands. Less affluent individuals looking for affordable status symbols should increase small luxury spending, while those in the upper-ranks may feel compelled to trade "down" in order to save money.

SEE: The Industry Handbook: The Retailing Industry

Adding Some Accessible Luxury to a Portfolio
With the American consumer once again showing some signs of strain, big ticket items may be off the radar for many households. However, many are still finding a way to purchase aspirational or "near-luxury" goods. For investors, betting on these firms makes sense. A good broad play on the theme is the PowerShares S&P SmallCap Consumer Discretionary (Nasdaq:PSCD). The exchange-traded fund (ETF) tracks 107 different firms including, Iconix Brand's (Nasdaq:ICON) and Perry Ellis International (Nasdaq:PERY). However, there are plenty of individual choices as well.

While handbag maker Coach (NYSE:COH) has been the poster child for aspirational branding, the company has recently encountered some fierce competition in the space. Both Michael Kors Holdings (NYSE:KORS) and Vera Bradley (Nasdaq:VRA) recently went public and have seen great results. Kors Holdings recently reported that its net income more than tripled in its fiscal fourth quarter on the back of strong sales, while Vera Bradley saw revenue from its own stores jump more than 34% in its latest quarter. Both firms represent an interesting take on the near-luxury theme.

Given that the economic indicator is called the "lipstick effect," investors may want do just that and stick with beauty products. Both Revlon (NYSE:REV) and Estee Lauder (NYSE:EL) make compelling buys as consumers trade up to "higher level" personal products. Likewise, fragrance firm Elizabeth Arden Inc. (Nasdaq:RDEN) recently purchased the global licenses for Ed Hardy, True Religion and BCBG Max Azria fragrance brands. All three firms could see higher sales as the lipstick effect takes hold in the upcoming months.

The Bottom Line
With consumer confidence once again in the dumps, analysts predict that the lipstick effect will come back with a vengeance. For investors, that means loading up on aspirational or near-luxury brands. Companies that market these affordable status symbols will be the catalysts for growth in the sector. The previous ideas, along with watch producer Movado (NYSE:MOV), make ideal selections to play the economic effect.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  2. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Mining Sector

    Learn about the top three metals and mining exchange-traded funds (ETFs), and explore analyses of their characteristics and how investors can benefit from these ETFs.
  3. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  4. Investing News

    Top Tips for Diversifying with Mutual Funds

    Are mutual funds becoming obsolete? If they have something to offer, which funds should you consider for diversification?
  5. Professionals

    Top Stocks to Short, Go Long On to Beat the Market

    A long/short portfolio can help weather a variety of market scenarios. Here's how to put one together.
  6. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  7. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  10. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!