What luxury is telling us.

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Christmas is just days away, a good time to review the shopping season. I think a bit about the luxury retail market, because where the wealthy lead, the market – and the economy as a whole – tends to follow. This past year was the worst for the luxury industry since the Great Recession of 2007-09.

While the ultra-rich are still spending in a different gravitational orbit, aspirational consumers, who make up the all-important “mass luxury” segment of the market, are pulling back. That goes a long way to explaining why many of the world’s biggest luxury companies have underperformed lately. After all, there are only so many watches and handbags that the one percent can buy.

And the number of people who can afford such a thing is decreasing. The latest Bain Luxury Market Report, released in November, showed that the luxury market has shrunk by about 50 million consumers over the past two years, in part because younger consumers are turning away from traditional luxury goods. I suspect this is one of the reasons you (finally) see older people, especially older women, in advertising and fashion. They are the only ones who buy things.

But there are other reasons for the loss of luxury, including a widespread sense that despite buoyant markets, economic instability is imminent.

If you subtract the V-shaped Covid blip, we’re six years away from recession. Meanwhile, the amazing US equity markets, traded to perfection, have everyone at a New York dinner party talking about when (and if) they’re considering moving at least some of their portfolios into cash.

Despite this, or perhaps because of it, the super rich can still spend. Those in the wealthiest segment of the luxury market — those who spend their spare cash on yachts and jets (both sectors are doing very well) — have seen their net worth boosted by double-digit property market growth. There is a huge fleet expansion in the ultra-high-end cruise business, and growth in luxury cars and hotels remains strong.

But many rich people who were once ready to buy that $500 bag are becoming more cautious. Because they, like the super rich, still have to worry about working. According to Bain’s research, disposable incomes of discretionary consumers have declined, driven by reduced job vacancies and an increase in voluntary sales. That’s why overall luxury sales are expected to decline by about 1 percent in 2024, and remain flat next year.

So what does all this tell us about what’s to come in the wider economy in 2025? There are three key lessons.

First, there will be a US equity market correction, maybe this year, maybe next. But the few wealthy people I’ve talked to have no doubt it’s on the way. The fact that even the wealthy are holding back on buying fine wine, jewelry, watches, and art means that more affluent consumers are anticipating a market downturn and some sort of market correction, even if we haven’t seen it yet. A raging trade war.

Second, if the latter comes, the luxury sector dominated by high-priced European goods will fall faster and harder than other areas. Europe doesn’t have tech giants, but it does have luxury conglomerates – two of the five biggest European companies by market capitalization are LVMH and Hermès.

If Trump turns his critical eye to the continent, he can easily imagine the products these companies could target for tariffs. Remember when the EU slapped tariffs on motorcycles over Trump’s steel and aluminum tariffs and added $2,200 to the price of a Harley-Davidson? European luxury brands – including German automakers and French fashion houses – would be easy political pickings.

Finally, there is a growing sense in the luxury business that some of the inflation we have seen over the past several years simply cannot be sustained. Already only the top name brands in any personal luxury category can maintain their price points, as aspirational customers turn to cheaper watches or spirits.

Ditto travel and entertainment. I recently spoke with two private equity investors in the U.S. hotel business who predicted that high-end markets such as Jackson Hole, Nantucket and Martha’s Vineyard would probably do well with a nosebleed in a four-star hotel room in Houston Tuesday night, the first sign of a market correction. It goes down.

For those of us who have seen $500 hotel rooms in major US cities look like the new $300, this is welcome news. But while we wait for rates to drop, there’s always a bit of a buzz around a high-end beauty item.

The “Lipstick Index,” created by beauty titan Leonard Lauder, says that when small luxuries are purchased as new makeup items, failure is likely. In the year In 2024, beauty was one of the few luxury categories with good growth as consumers wanted that little bit of sparkle.

If my husband is reading this, I’m hoping for a tube of Celine Rouge Triumphe in the stocking.

rana.foroohar@ft.com