Jim Paulsen, a former chief investment strategist at Leuthold Group, emphasizes the significance of observing Walmart as a key predictor of recessionary trends. He has developed an indicator known as the "Walmart Recession Signal" (WRS), which compares Walmart's stock performance to the S&P Global Luxury Index—an index representing 80 companies engaged in the luxury goods market. Paulsen argues that since economic downturns often impact lower-income individuals first, a rise in Walmart's stock price might indicate an impending economic contraction.
In a recent Substack post, Paulsen highlighted that the WRS has reached its highest level since the 2008 financial crisis, stating, "'Walmart Worries' just keep multiplying. It’s currently close to the highest level ever recorded, which was during the Great Financial Crisis of 2008-09."
The foundation of the WRS is predicated on the notion that during economic downturns, consumers typically alter their purchasing patterns by favoring discount retailers like Walmart while reducing expenditure at luxury stores. This behavior serves as a mechanism for households to minimize expenses during times of financial strain. Paulsen noted, “As economic activity slows and recession risk builds, retailing purchasing patterns tend to gravitate toward discounters like Walmart and away from luxury retailers.”
Walmart has shown a consistent upward trajectory over the past year, with its stock price surging over 40% year-over-year, reaching $123.95 as of Tuesday afternoon. Comparatively, the S&P Global Luxury Index has seen a modest increase of over 7.7% year-over-year to $5,544.98, but it has experienced a decline of 13.6% since the beginning of the year.
The national economy currently finds itself in a precarious state, shaped by a series of consecutive shocks. A troubling jobs report for February revealed an unexpected loss of 92,000 jobs, coinciding with a rise in the unemployment rate to 4.5%. Geopolitical factors, including the conflict in Iran, have exacerbated economic challenges, causing a spike in oil and fertilizer prices. For instance, gas prices have recently exceeded $4 per gallon. Additionally, the housing market is grappling with severe affordability issues, while consumer confidence remains low.
These elements are converging to increase the probability of a recession, as indicated by Moody’s Analytics, which recently upped its recession forecast for the coming year to 48.6%. This follows an adjustment from Goldman Sachs, predicting a 30% chance, while EY-Parthenon places the likelihood of recession at 40%.
Mark Zandi, chief economist at Moody’s Analytics, expressed concern regarding the elevated likelihood of recession risks, stating, “Recession is a real threat here.”
Walmart’s booming year and heightened recession odds
Walmart has experienced a remarkable year, having been ranked number one on the Fortune 500 for 13 consecutive years until being surpassed by Amazon in February. The retail giant reported a revenue of $190.7 billion in the last quarter, reflecting a 5.6% increase compared to the same period last year. Full-year revenue also saw a rise of 4.7%, reaching $713.2 billion.
Paulsen noted that the WRS displays a historical correlation with both annual real GDP growth and unemployment rates. He observed that in prior economic downturns throughout the 1990s and the 21st century, the WRS rose preceding declines in real GDP growth. Moreover, every rise in unemployment has been prefaced by an uptick in the WRS.
Addressing factors influencing the WRS, Paulsen points to deteriorating consumer sentiment, disappointing job postings, and the ramifications of the Iran conflict, among other considerations. He further cautions that the economy may not be facing a public credit crisis, but rather a private credit crisis, given the historical linkage between the WRS and the valuation of private credit.
Despite these signals, Paulsen does not predict an immediate recession, suggesting that the U.S. may be able to avoid one this year. Nonetheless, he asserts, “I am becoming more convinced that a significant U.S. economic slowdown is unfolding that will ultimately require additional economic policy accommodation and lower interest rates to rectify.”
Share this story