DEFINITION of 'Skirt Length Theory'

The skirt length theory is a superstitious idea that skirt lengths are a predictor of the stock market direction. According to the theory, if short skirts are growing in popularity, it means the markets are going up. 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. 

BREAKING DOWN 'Skirt Length Theory'

The idea behind skirt length theory is that shorter skirts tend to appear in times when general consumer confidence and excitement is 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.

The Case for Skirt Length 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. In the 1920s - AKA 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. 

Skirt length theory is a fun theory to talk about, but it would be impractical and dangerous to invest according to it. 

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