How Walmart Can Help Predict a US Recession

Given the unreliability of many traditional recession indicators in recent years, investors may be looking for a new one.

Examples of such indicators are the inverted yield curve, the leading economic index “conference board” and the rapid rise in interest rates in 2022 and 2023.

The point is that economic soft landings that seem to be reflected in current stock prices can initially look like recessions due to weakening economic data. Investors who wrongly anticipate a recession may adopt overly conservative strategies, thereby missing out on potential gains.

For example, those who pulled out during the S&P 500’s decline in April missed out on subsequent gains in May and the first half of June.

Jim Paulsen, Chief Investment Strategist at Paulsen Perspectives, thinks, that the unique position of the American store Walmart can provide valuable information about trends in the recession. Walmart’s focus on budget-conscious shoppers offers management a clear perspective on consumers’ financial health, especially among people on limited incomes who are often the first to experience economic hardship.

Paulsen developed the so-called Walmart Recession Signal (WRS) – an indicator that compares the company’s stock price to the S&P Global Luxury Index. The purpose of this comparison is to track changes in consumer spending from luxury goods to more affordable options as the economy slows and recession risks increase.

Overlaying the WRS with corporate credit spreads, Paulsen pointed to a close correlation since 2007. This is not unexpected, as credit spreads – the difference between corporate and government debt yields – tend to widen as recessionary risks increase.

It is especially intriguing when WRS and credit spreads send conflicting signals.

Although both indicators predicted the financial crisis in 2007, in 2015 and 2016 the WRS remained stable even as credit spreads widened, indicating a recession that never occurred. Again in the second half of 2019, the WRS signaled a recession, while credit spreads did not.

Paulsen said those spreads have been narrowing throughout the year, suggesting a healthy economy without significant financial pressures. However, the WRS has risen to its highest levels since the recession in 2020.

In the latter two cases, the indicator turned out to be accurate, while the credit spreads were not. Will he be right this time?

Paulsen remains cautious about the metric because of its short history and other indicators suggesting a robust economy.

“Balance sheets are strong, liquidity is ample, job creation has slowed but remains positive, and real wages and earnings continue to risehe stated.

The analyst believes the WRS suggests a soft landing, but if it continues to rise, investors may need to reconsider recession risk.