Walmart as an Economic Indicator: A New Tool for Investors

In the quest for reliable recession indicators, Walmart (WMT 0.27%) emerges as an unexpected player on Wall Street. As traditional metrics like the inverted yield curve falter, investors are turning to innovative approaches to gauge economic health.

The Search for New Economic Signals

Investors might be in the market for a new economic signal, given the failure of many traditional indicators in recent years. These range from the inverted yield curve and the Conference Board’s Leading Economic Index to the rapid increase in interest rates in 2022 and 2023.

The challenge is that soft economic landings—currently being priced in by the stock market—often resemble recessions initially, as both feature weakening economic data. Investors who mistakenly anticipate an imminent recession might adopt overly conservative positions, missing out on potential gains. For instance, those who withdrew their investments due to the S&P 500’s (SPX 0.11%) downturn in April would have missed the gains in May and the first half of June.

Market reactions often overreact to economic signals, potentially causing missed opportunities amidst perceived risks, WSJ Print Subscription said.

Enter Walmart

Jim Paulsen, chief investment strategist at Paulsen Perspectives, believes Walmart’s focus on value-conscious shoppers offers keen insight. This focus is particularly crucial for understanding the financial health of lower-income consumers. They tend to feel recessions’ impact before others.

Paulsen proposes that Walmart provides valuable insights for recession watchers. His Walmart Recession Signal (WRS) compares Walmart’s stock to the S&P Global Luxury Index. This metric detects shifts in consumer behavior during economic slowdowns. It highlights increased preference for Walmart over luxury goods in recessionary periods.

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Correlation with Credit Spreads

Paulsen correlates the WRS, which rises as the economy deteriorates, with corporate credit spreads. Since 2007, these two indicators have closely mirrored each other. This correlation is expected because credit spreads—the difference between yields on corporate and Treasury debt—typically widen as recession risks grow.

The intriguing aspect is when the Walmart indicator and credit spreads diverge. Both predicted the 2007 financial crisis accurately. However, in 2015 and 2016, the WRS remained steady while credit spreads widened, indicating a recession that never materialized. The Walmart indicator proved correct again in the second half of 2019, signaling recessionary warnings even as credit spreads did not.

Current Observations

Paulsen observes that credit spreads have been tightening throughout the year, indicating no significant financial stress and a robust economy. Yet, the WRS has surged to its highest levels since the 2020 recession. In the past two instances, the WRS was accurate while credit spreads were not. Will this pattern hold for a third time?

Paulsen acknowledges uncertainty about Walmart’s metric weight due to its short history and conflicting indicators. He notes strong balance sheets, ample liquidity, and positive trends in job creation, real wages, and profits. Paulsen speculates the Walmart Retail Sales (WRS) suggests a soft landing, but warns increasing WRS could indicate recession risks.

Walmart Investors Rejoice

Regardless, Walmart investors have thrived. The stock has reached record highs, bolstered by a strong first-quarter report and an annual shareholder meeting that emphasized its tech-focused strategy and market gains. The stock has risen nearly 18% since Barron’s recommended it last July, outpacing many of its competitors.

In conclusion, while traditional economic indicators have faltered, Walmart’s unique position in the market and Paulsen’s WRS offer a fresh perspective on assessing economic health and recession risks.

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