How Walmart Stock Can Predict the Next Recession

how walmart stock can predict the next recession

You can get anything you need at Walmart. Even, perhaps, an accurate recessionary signal.

At this point, investors might be shopping for a new one, given so many trusted indicators haven’t panned out in recent years. The list goes from the inverted yield curve to the Conference Board’s Leading Economic Index to the rapid rise in interest rates in 2022 and 2023.

The problem is that soft economic landings—stocks appear to be pricing one in now—often look like recessions at first, given that both involve weakening economic data. Investors who incorrectly believe a recession is imminent will position themselves too conservatively, missing out on profits.

As an example, anyone who pulled their money out of the market because they were spooked by the S&P 500’s pain in April would have missed out on gains in May and the first half of June.

That’s where Walmart comes in, argues Jim Paulsen, Paulsen Perspectives’ chief investment strategist. Its focus on value-conscious shoppers gives management an excellent view of the financial health of consumers, particularly those with less money, who are often the first to feel the pain of recessions.

But Paulsen says the company has more to offer for recession watchers. A metric he calls his Walmart Recession Signal compares Walmart’s stock price to the S&P Global Luxury Index, aiming to capture the movement when shopping patterns shift toward Walmart and away from more expensive goods as the economy slows and the risk of a recession grows.

Paulsen overlays the WRS, which rises when the economy worsens, with corporate credit spreads, finding that since 2007, the two have moved nearly in tandem. That isn’t surprising because credit spreads—the difference between yields on corporate and Treasury debt—often widen as recession risks build.

What is really interesting is when the Walmart indicator and credit spreads send different signals.

While both predicted the financial crisis in 2007, in 2015 and 2016 the WRS held firm, while credit spreads widened, pointing to a recession that didn’t arrive. The Walmart indicator was proved correct again in the second half of 2019, flashing a recessionary warning even as credit spreads didn’t.

And today? Credit spreads have been tightening all year, Paulsen notes, indicating no real financial pressure and a healthy economy. Yet the WRS has risen to its highest levels since the 2020 recession.

The last two times, the WRS was right, while credit spreads were wrong. Will the third time prove the rule?

Paulsen says he isn’t sure how much weight to give the Walmart metric, given its short history and the fact that other indicators put the economy on relatively healthy footing. “Balance sheets are strong, liquidity is ample, job creation has slowed but is still positive, and real wages and profits continue rising,” he wrote. “My guess is the WRS is pointing to a soft-landing, but if it continues rising, investors may want to give recession risk additional consideration.”

If nothing else, investors in Walmart itself have been winners. The stock has reached record highs, thanks to the company’s strong first-quarter report and an annual shareholder meeting that highlighted its tech-focused strategy and market gains. The stock is up nearly 18% since Barron’s recommended it last July, even as many of its peers have lagged behind.

There is no slowdown there, at least.

Write to Teresa Rivas at [email protected]

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