What Is the Skirt Length (Hemline) Theory?
The skirt length theory is a superstitious idea that skirt lengths are a predictor of stock market direction. According to the theory, if short skirts are growing in popularity, it means the markets are going to go up. Conversely, if longer skirt lengths are gaining traction in the fashion world, it means the markets are heading down.
The skirt length theory is also called the hemline indicator or the "bare knees, bull market" theory.
- The skirt length theory proposes that skirt hemlines are higher when the economy is performing better, and longer during downturns.
- To its merit, the hemline indicator was accurate in 1987 when designers switched from miniskirts to floor-length skirts just before the market crashed. A similar change also took place in 1929.
- Very few, however, trust the validity of the theory as an accurate predictor of markets and it is considered market lore.
Understanding the Skirt Length (Hemline) Theory
The idea behind skirt length theory is that shorter skirts tend to appear in times when general consumer confidence and excitement are high, meaning the markets are bullish. In contrast, the theory says long skirts are worn more in times of fear and general gloom, indicating that things are bearish.
Though seemingly a far-fetched idea, the skirt length theory has worked on a few occasions since it was first suggested in 1925 by George Taylor of the Wharton School of Business. Examples include the soaring popularity of short skirts in the 1990s when the tech bubble was increasing, and designers switching from miniskirts to floor-length skirts just before the market crashed in 1987.
Skirt length theory is a fun theory to talk about, but it would be impractical and dangerous to invest according to it.
Limitations of the Skirt Length (Hemline) Theory
Although investors may secretly believe in such a theory, most serious analysts and investors prefer market fundamentals and economic data to hemlines. The case for skirt length theory is really based on two points in history, and is considered by most experts to be a market anomaly.
In the 1920s—or the "Roaring Twenties"—the economic strength of the U.S. led to a period of sustained growth in personal wealth for most of the population. This, in turn, led to new ventures in all areas, including entertainment and fashion. Fashions that would have been socially scandalous a decade before, such as skirts that ended above the knees, were all the rage.
Then came the Crash of 1929 and the Great Depression, which saw new fashions dwindle and die in favor of the cheaper and plainer fashions that preceded them. This pattern seemingly repeated in the 1980s when mini-skirts were popularized along with the millionaire boom that accompanied Reaganomics. The pendulum of fashion swung back to longer skirts in the late 80s, roughly coinciding with the stock market crash of 1987. However, the timing of these incidents, let alone the strength of the potential correlation, is questionable.
Although there may be a defendable thesis around periods of sustained economic growth leading to bolder fashion choices, it is not a practical investment thesis to work with. Even benchmarking skirt length in North American would be a challenging undertaking. The time spent auditing clothing outlets to establish the length of top-selling skirts would take more time than it is worth considering that it is far from proven as to whether the hemline indicator is leading or lagging.
Other Unconventional Economic Indicators
The skirt length theory is just one of a host of unconventional economic indicators that have been proposed since the advent of market tracking. Some other unconventional economic indicators that have been promoted include:
- Men's underwear: The Men’s Underwear Index is an unconventional economic indicator long favored by former Fed Chair Alan Greenspan that purports to measure how well the economy is doing based on the sales of men’s underwear. This measure suggests that declines in the sales of men’s underwear indicate a poor overall state of the economy, while upswings in underwear sales predict an improving economy.
- Haircuts: Paul Mitchell founder John Paul Dejoria suggests that during good economic times customers will visit salons for haircuts every six weeks, while in bad times haircut frequencies drop to every eight weeks.
- Dry-cleaning: Another favorite Greenspan theory, this indicator suggests that dry cleaning drops during bad economic times, as people only take clothes to the cleaners when they absolutely need to when budgets are tight.
- Fast food: Many analysts believe that consumers are far more likely to purchase cheaper fast food during financial downturns, and more likely to focus on buying healthier food and eating in nicer restaurants when the economy heads into an upswing.
- Headache medication: The Aspirin Indicator posits that stock prices and aspirin production are inversely related. This indicator suggests that when the market is rising, fewer people need aspirin to heal market-induced headaches. Lower aspirin sales, therefore, should indicate a rising market.