Fashion and finance might seem like an unlikely pair, but the two are more closely intertwined than one might think. Apart from the impressive $1.7 trillion valuation of the fashion industry, its 3,384.1 million labour force, and the fact that it accounts for 2% of global GDP, the fashion industry is also pulling some weight in the stock market.
The S&P 500 index includes some of the world’s prestigious fashion brands, such as Nike, Ralph Lauren, and Gap. Recently, Lululemon Athletica, an athleisure wear maker, also joined the S&P 500, and its stock’s Relative Strength (RS) Rating grew from 86 to 93, placing it in the top 10% of performers. This article explores what you need to know before investing in these fashion and apparel stocks on the S&P 500 index.
How is the Fashion Industry Faring?
According to Placer.ai, apparel retail visits are rising after a drop in 2020. As of May 2023, luxury, second-hand, and off-price fashion retailers have seen a surge of 25.3%, 33.5%, and 37.9%, respectively, compared to 2019. Fashion critic Rachel Tashjian suggests this is due to “revenge shopping,” where consumers make up for lost shopping time.
In “The State of Fashion 2023 report” by McKinsey, the authors predict that the fashion industry will face the challenge of dealing with inflation while simultaneously seeking opportunities to change consumer behavior, evolving marketing strategies across channels and digital platforms, and adapting manufacturing methods.
McKinsey also forecasts a 5-10% growth in the luxury fashion sector, driven by solid momentum in the U.S. and China. Meanwhile, eToro’s analysis of UK and European fashion stocks reveals that luxury brands grew by 90% in 5 years, while fast fashion only increased by 23%.
Investing in Fashion Brands in the S&P 500
To invest in the S&P 500, you need to purchase individual stocks of S&P 500 companies or invest in an S&P 500 index fund through a mutual fund or ETF. Investing in fashion brands can be volatile, especially as they tend to be influenced by trends like the growing interest in sustainable options, consumer needs, and the economic environment. So, before investing in any fashion brand, you want to compare inventory and revenue trends, study their gross margin trends, and examine the company’s share price to the company’s earnings per share. If you notice a sequential decline in the amount of money the brand retains after incurring product-associated costs, this may be a cue that something is wrong.
Fashion stocks within the S&P 500 have had their fair share of upward and downward trends, and only your own trading strategy can determine what you should or shouldn’t invest in. Some investors use fundamental factors like geopolitical and economic events to determine what to invest in, while others carry out technical analysis using tools like Fibonacci retracement, moving averages, and the ES futures chart.
When considering trading options in various sectors in the U.S stock market, it’s essential to understand the significance of specialized instruments such as futures contracts. Just as investors monitor the S&P 500 Futures chart to speculate on the index’s future performance, individuals in different fields, including fashion investing, can employ derivative instruments to manage risk and make strategic decisions.
Think of a futures contract as an agreement where people make bets on the future price movements of an asset. The chart helps investors track the price movement of the S&P 500, and the futures contract itself is a tool that traders can use to speculate on the performance of the asset. In this case, as people speculate on the future performance of the index, the ES Futures chart reflects this movement through lines and numbers.
Challenges of Investing in Fashion Brands under the S&P 500
Investing in the fashion industry may come with some challenges. The fashion industry relies on markets like gold, cotton, and other complex sectors. This means that a large number of things can have an impact on how the market and its stocks perform. Issues like international tensions can impact the export of raw materials like wool, silk, and precious metals used to produce clothes, footwear, and other fashion ornaments.
For example, in October 2020, China ordered its mills to stop buying Australian supplies because there was speculation that Australia was planning to tax Chinese cotton heavily. Situations like this could affect the production and export of fashion items that rely on cotton products from China.
As with any investment, it’s crucial to conduct thorough research and employ a strategy that aligns with your financial goals. With the right approach, you can discover the winning combination where style meets stocks, creating a well-rounded and potentially profitable portfolio.