Don't Go Long on Short Skirts

An old market theory insists that higher hemlines mean the bulls are charging. Not in these anxious times, however

By Amy Tsao

About a week ago, we market reporters at BusinessWeek Online received an intriguing e-mail from a reader. He pointed out that women's hemlines are rising. In the past, shorter skirts have coincided with bull runs for the stock market. "Why isn't the stock market on the rise?" he asked.

Stocks and skirts. Lots of market observers contend the connection is as flimsy as a gauzy summer kilt. "In general, such indicators are no better than astrology," says Peter Cohan, president of management consulting firm Peter Cohan & Associates. However, amid today's worries and uncertainties -- terrorism, job insecurity, skyrocketing costs for health care among them -- people are looking for "a handle they can grab on to," he says.

Hemlines are indeed moving up, but mainly among teenage girls. The skirts (as well as girls' shorts and shirts) are teeny-tiny at stores such as Abercrombie & Fitch (ANF ) and American Eagle Outfitters (AEOS ). But a review of clothes for women who have moved beyond puberty paints a more austere picture. At retailers Ann Taylor (ANN ) and Talbots (TLB ), the styles of skirts are decidedly longer -- just above or below the knees.


  The variety of skirt lengths in 2004 complicates the hemline-markets theory, which was said to have been introduced in the 1920s by George Taylor, an economist at Wharton Business School. His logic: Women wear shorter skirts when they have the means for silk stockings. They wear longer ones when money's tight and they can't afford to don such finery.

A correlation does seem apparent. In the 1920s (flappers) and 1960s (mods), dresses and skirts were shorter, and stocks had a terrific run. In the 1930s and 1940s, hemlines dropped, and for the most part share prices did, too.

No doubt, the mass market of Taylor's day and in the decades through the 1960s was far more homogeneous than it is today. Market pundits could draw wider conclusions in the past, says Eric Jemetz, senior equity analyst at asset-management firm Rockefeller Partners. "Things are so much more splintered now. It's definitely harder to say."

But today's split personality on hemlines does seem to mirror schizophrenia on Wall Street. Stocks in January, 2004, were off to an impressive start, but the ride has been much bumpier since February. Year-to-date, the Standard & Poor's 500-stock index is flat, while the blue-chip Dow Jones Industrials average is down 1%. "The fact that skirts are both very short and increasingly longer says a lot about the state of the economy," says Wendy Liebmann, president at WSL Strategic Retail.


  The economy and the stock market, by proxy, have been sending mixed signals. Some trends are promising: Most economic reports -- on housing, manufacturing, and productivity -- point to ongoing recovery. Corporate earnings growth across the board have been robust over the past several quarters.

But many pressures are making investors nervous. This summer, "we had a confluence of events," says Stephen Biggar, vice-president of equity research at Standard & Poor's. The Republican and Democratic Party Conventions and the summer Olympics stoked fresh worries about terrorism. Oil prices have been stubbornly high, and the Federal Reserve is in tightening mode.

Over the year, S&P's Investment Policy Committee has been weighing the good and bad economic signals. Since the start of 2004, the committee has ratcheted down its one-year target for the S&P 500, from 1,230, to 1,130 -- a difference of 8%.


  Maybe it's not a coincidence that some skirt lengths, too, are heading in a more conservative direction. Followers of fashion say the garb at this year's fashion shows harkens to more of a "ladylike" look. Such polished, understated styles suggest people may be trying to gain some control over harrowing times -- economic and otherwise.

"People seem to be looking to present a somewhat more refined sense of themselves," Liebmann says. "They want to say, 'I can live in these strange times and present a well-groomed persona.'"

Certainly, making investing decisions based on women's skirt lengths alone probably won't give you a leg up. But next time you walk down the street, just to be on the safe side, it might be worth counting knees.

Tsao is a reporter for BusinessWeek Online in New York

Edited by Thane Peterson

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