Why this strategist thinks 2024 is year of the vanity trade

Consumer habits have been in flux since inflation ravaged prices throughout different sectors in 2023. Retail spending was up for the month of December 2023, but was that for the holidays, or is there something else at play?

Marketguage.com Chief Strategist Michele Schneider argues that "revenge spending" in self-care and beauty products — coined as vanity stocks — was a result of consumer savings during early inflation, which may continue into 2024.

Schneider joins Yahoo Finance to discuss why investors should keep an eye on several vanity-based stocks in 2024, particularly in clothing, cosmetics, and home exercise products.

"The fact that last year the market really depended on the consumer and where did the consumer go? Did a lot of traveling, a lot of eating out, and emerged from the doldrums with a YOLO attitude, you only live once," Schneider elaborates. "As I started to see those trends change, I started to realize I was talking to more and more people — not just women — but men and women who were talking about... 'this year I want to take care of myself more.'"

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

RACHELLE AKUFFO: We're nearly one month into 2024. And for many people, a new year means new goals for the year ahead. Our next guest is calling 2024 the year of the vanity trade. Here with more is Michele Schneider, chief strategist at Marketgauge.com.

Good to see you. So we're talking about vanity stocks, which covers investments in beauty, skincare, self-help, diet drugs, and dating. Why do you think this is going to be the year? And what are some of the standouts for you?

MICHELE SCHNEIDER: Well, good to see you both. Well, let's start with the fact that last year, the market really depended on the consumer. And where did the consumer go? Did a lot of traveling, a lot of eating out, and emerged from the doldrums with a sort of YOLO attitude, right, You Only Live Once.

And as I started to see those trends change, I started to realize that I was talking to more and more people, and not just women but men and women, who were talking about, you know what, this year, I want to take care of myself more. I've neglected myself. I've gained weight.

So ozempium, you know, obviously hit the market. And then what does that trickle into? I want to take care of my skin. I want to wear nicer clothes. I want to work out.

And when I started to put that together, I started to look at all the stocks that really are relevant to that from a fashion chain like a Ralph Lauren, or a TJ Maxx, or a Columbia, or AEO to make up, which would be Coty and elf, or even Nu Skin. Then I started looking at things like dating. Maybe people would start dating, so Match and Bumble. Working out, I was particularly interested in Peloton.

And then in terms of the-- from the biomed space, companies like AbbVie and also companies that are making more injectables like Novo, for example. So I put that all together, I almost came up with a basket, if you will, of an ETF we could call vein. And it's an interesting basket because some of them are doing really well and some of them are still floundering near the lows and could emerge as the year goes on.

AKIKO FUJITA: Yeah, I like that ETF vein. I feel like that would catch on pretty quickly. Michele, this comes at a time though when we've been hearing more and more on these earnings calls too that discretionary spending is pulling back. Consumers are sort of becoming a little more cautious.

So if the spending is happening in the vanity space, where's the trade off? What are they doing instead? Like vanity instead of what?

MICHELE SCHNEIDER: I would say vanity instead of the discretionary spending that we've seen in a lot of recreational activities outside of the home, whether that would be travel and eating out, that kind of thing. I mean, we still have obviously a strong service economy. The numbers even that came out today showed the service industry is still strong.

But I would imagine that if we're going to cut back and then I could just look at it from a personal standpoint if-- and I'm not saying I'm doing this-- but if I were saying this is the year I'm going to just focus on me, where would I cut back? Most likely I would cut back on going out to eat because the food prices are still very high. And very quietly so far this year, Akiko, we're seeing sugar go up. We're seeing DBA, which is talk about ETFs, that basket of a lot of agriculture all of a sudden gapped up and keeps flying higher here.

So if you're going to say, well, I still need to feel good about myself. And I can feed my family, but I can still take care of myself. Because after all, at some point, people have to feel good about themselves in order to even take care of their families. That's where we're looking.

But you brought up a great point and that is the consumer in general. And that's why in this little thorn in the side of vanity, if you will, is ETF XRT, which is a nice talk about a basket, a nice basket of staples and discretionary stocks in the retail space that is really falling behind. And even as we're speaking today with SPY and QQQs making new highs in lots of the growth stocks, that is just sort of floundering and actually has been red a couple of times already this morning.

That could be an indication that we're not quite ready to maintain the high prices of the beauty stocks we talked about. And the ones that have been beaten up could go lower. So you know, it's always going to be timing, but keep an eye on XRT.

RACHELLE AKUFFO: And Michele, I want to take a deeper dive into some of these beauty stocks, especially when you look at the performance of elf over the past year up 183%. Whereas, you look at Estee Lauder down 53%. What are they doing right? What is it about either the product, the product mix, or the fundamentals of the business that are making them more of a standout?

MICHELE SCHNEIDER: Well, first of all, they are more broadly represented. Like Ulta, for example, would be a big carrier of it. I think also, believe it or not, it's a sexy name. And so you've gotten into a lot of people, oh, I love elf products. And whether they really love elf products compared to Estee Lauder products or Coty products, what is that really based on?

So I think there's just been this overall mentality and they're priced well. Their products are priced well. But you can see just from that whole movement up, whether you're going to compare it to Estee Lauder or Coty.

And Coty is not doing too badly. It just hasn't really broken out yet. Yeah, that's like the NVIDIA of semiconductors, if you will. It's been more popular and therefore more investments and therefore more profits.

AKIKO FUJITA: We didn't even get into GLP-1 there. Michele, much more to come. We'll have to have you back on the show. Michele Schneider, Marketgauge.com strategist, good to talk to you today. Appreciate the time.

MICHELE SCHNEIDER: Thank you so much.