MARKET COMMENT
Kylie's Stock Market Lesson

By David Kuo (TMFDragon)
May 7, 2002

What on earth was Kylie Minogue wearing last week? Now for those who unfortunately, or fortunately as the case may be, missed the tabloid press here's the low-down. The antipodean diva of pop was emblazoned across many of the front pages of the red tops garbed in one of the shortest skirts known to man. Was it a mini, a micro-mini or perhaps even something more risqué, say a nano-mini? Furthermore could this be an indication of what the sartorially astute ladies will be squeezing into this summer.

You can be excused for wondering what Kylie's sartorial proclivities have to do with personal finance but here's the answer. There is a theory, appropriately known as the Skirt Length Theory, which looks at the length of hemlines in relation to how the stock market is likely to perform. The theory here is that skirt length can be a forward predictor of stock market direction. In a nutshell shorter skirts mean that confidence within the economy is high. Furthermore this excitement and over exuberance could well overflow into the stock markets and lead to unbridled bullishness. The downside to all this is that longer skirts are an indication of gloominess and that the stock market could be heading south.

But before you make tracks to the high streets to conduct your personal investigations into the state of the nation's hemline let's take a closer look at the long and the short of the stock market instead. Stock markets or more appropriately stock market indices are forward indicators of how investors perceive businesses will perform some time in the future. It is governed by the valuations of those businesses that go to make up the indices. These valuations are, in turn, based on forward earnings estimates and the level of risk associated with those projections.

Of course investor confidence plays a huge part in the performance of the stock market also. At the moment there is some doubt not only over the ability of global economies to recovery but also in the ability of companies to deliver the profits that would justify their current valuations. But what is incontrovertible is that businesses, both large and small, strive to improve their earnings. Furthermore those endeavours will, in time, lead to improved performance by these companies. That is why over the long-term stock markets rise regardless of what hemlines might do over the short-term. So instead of watching those hemlines try to concentrate instead on how those companies that you are invested in are coping with the rapidly changing business environment.