What Is the Lipstick Index? What Does It Predict?
Forget candlestick charts and Bollinger Bands—when it comes to predicting the stock market, some analysts take an unconventional approach. The lipstick index is a financial indicator that uses cosmetic sales to forecast bear markets or recessions.
The idea came from Leonard Lauder, billionaire heir to the Estee Lauder fortune. Estee Lauder is one of the ten largest cosmetics companies in the world with a market cap of $81 billion. Lauder noticed how, during recessionary periods, when consumer spending usually drops, sales of his products actually increased. Lauder reasoned that while consumers may cut back on discretionary items, they still spent money on “affordable luxuries.” These items were not expensive, like apparel, jewelry or designer bags; rather, they were lower-priced goods, like makeup.
Wall Street took notice.
Why Would Lipstick Be “Recession-Proof?”
Even when other areas of the economy are faltering, makeup sales—and lipstick, in particular—aren’t as affected by inflationary pressures. Lipstick has wide profit margins: A tube of lipstick costs about $2.50 to produce yet can command as much as $35. In addition, the cosmetics industry as a whole doesn’t match pace with other sector price increases. NielsenIQ recently reported that while prices for consumer-packaged goods rose 8% at the end of 2021, health and beauty goods increased by just half that amount—4%.
And unlike food products or semiconductors, cosmetics aren’t as affected by volatile energy prices, outside of the costs of packaging and shipping.
Then there are other factors to consider, such as the very intrinsic value of lipstick. Throughout history, women have associated the application of makeup as an act of defiance and liberation. Psychoanalysts have equated brightly colored lipstick, down to its bullet-shaped applicator, as a form of armor, or protection, against the world. And advertisers often proclaim how “just one swipe” of lipstick could change someone’s mood—and even instill confidence.
When Did the Lipstick Index Start?
Real-World Examples That Support the Lipstick Effect
- While industrial production plummeted 50% during the Great Depression, makeup sales actually increased between 1929 and 1933.
- During the 1990 recession, the only area of the manufacturing sector to witness employment gains was the cosmetics industry, due to unceasing demand.
- The recession of 2001 was fueled by the September 11, 2001 terrorist attacks, but The Wall Street Journal reported that lipstick sales rose 11% over the period, especially for more expensive “prestige brands.”
- During the Great Recession of 2008–2009, the worst economic contraction since World War II, cosmetics brands like L'Oréal, Beiersdorf (maker of Nivea) and Shiseido all reported substantial gains.
- And while sales of lipstick actually declined during the COVID-19 pandemic, (which makes sense considering covering one’s nose and mouth was the premier form of disease prevention), perfume sales rose higher, as consumers stayed at home and focused on self-care. In fact, sales of men’s fragrances grew 21% in the first six months of 2021 compared to the previous year.
Where Are Lipstick Sales at Now?
In June 2022, the latest report from NPD Group, a global marketing analytics firm, stated that lipstick sales had increased a whopping 48% over 2021. And while it should be noted that cosmetic sales can also see gains in when the economy is strong, large percentage increases like these, taken in tandem with grim GDP and inflation numbers, could mean that the U.S. economy will soon enter a recession—if it isn’t in one already. After all, the NBER officially defines economic cycles 12–18 months after the fact.
What Are Some Ways to Invest in This Contrarian Indicator?
As the global beauty industry rings in over $500 billion worth of sales each year, investors who follow the Lipstick Index could find opportunities to profit even when the broader market is down.
ETFs such as S&P 500 Consumer Staples Index (SPLRCS), the iShares S&P 500 Consumer Staples Sector Index (IUCS), and the MSCI Europe Household and Personal Products Index (SXQP) count cosmetic giants like Estee Lauder, L'Oréal, Beiersdorf among their holdings.
What Are Some Other Unconventional Indexes?
There may be no crystal ball in finance, so analysts scrutinize nearly every item of our everyday lives for clues as to what the markets might do next.
Here are a few other unconventional indexes:
- The main idea of the Hemline Index, which began in the Great Depression era, is that the higher hemlines rise, the better the economy does.
- The Big Mac Index, which was conceived by The Economist magazine in 1986, uses the price of Big Macs as a sign of purchasing power in global currencies.
- The Used Car Index, which uses the Manheim Used Vehicle Value Index, illustrates how consumers spend more on used cars during strong economies and less during turbulent ones.