The Walmart Recession Index turns out to be true surprisingly often

In the American discount store chain Walmart, you can get everything you need. Perhaps even a subtle sign of recession.

Many investors are looking for a new way to see upcoming recessions since so many reliable indicators have failed in recent years. The list ranges from an inverted yield curve to the Conference Board’s leading economic indicator and the rapid rise in yields in 2022 and 2023.

The problem is that a soft economic downturn – stocks now appear to be pricing in one of the two downturns – often initially looks like a recession, because both are accompanied by weak economic data. Investors who mistakenly believe that a recession is coming will take an overly conservative stance and lose profits. For example, those who withdrew their money from the market in April due to fear of heights, missed out on big profits in May and the first half of June.

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That’s where Walmart comes in, says Jim Paulsen, head of investment strategy at Paulsen Perspectives BaronsFocusing on price-conscious buyers gives management excellent visibility into consumers’ wallets, especially those with less money, who are often the first to feel the pain of a recession.

But Paulsen says the company has a lot to offer recession watchers. A measure he calls the Walmart Recession Index compares Walmart’s stock price to the S&P Global Luxury Index. As shopping patterns shift toward Walmart and away from higher-priced goods, the economy slows and the risk of recession increases.

Walmart vs credit spreads

Paulsen also compared Walmart’s recession index, which rises when the economy worsens, with corporate credit spreads — the difference between corporate bond yields and government bonds — and found that the two have been moving closely together since 2007. This is not surprising because credit spreads often widen as Increased risk of recession.

Things get interesting when the Walmart index and credit spreads give different signals. While both predicted the financial crisis in 2007, the Walmart index remained flat in 2015 and 2016 as credit spreads widened and pointed to a recession that did not occur. The Walmart Index proved right again in the second half of 2019, issuing a recession warning when credit spreads were not.

And now?

Paulsen notes that credit spreads have been tight all year, suggesting little financial stress and a healthy economy. However, the Walmart index has risen to its highest level since the 2020 recession, and the last two times, Walmart has been right and credit spreads have been low. Will this be the third time?

Paulsen says he’s unsure how much weight to give Walmart’s measure, given its limited history and the fact that other indicators interpret the economy as relatively healthy. “Balance sheets are strong, liquidity is abundant, job growth has slowed but remains positive, and real wages and earnings continue to rise,” he wrote.

“I think the Walmart index is pointing to a soft landing, but if it continues to rise, investors may want to consider recession risks.”

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