Recession Warning: Walmart’s Stock Suggests More Economic Pain Is Coming

An indicator linked to Walmart, one of the US’s most iconic economic stalwarts, is flashing a possible recession warning, according to a Wall Street veteran.

Jim Paulsen — a longtime economist and the former chief investment strategist of the Leuthold Group — maintains the Walmart Recession Signal (WRS), which measures Walmart’s stock price against a basket of luxury stocks. The general idea is that the higher the gauge goes, the more risk there is of a sharp economic downturn.

As the chart below shows, the WRS is the highest since the Global Financial Crisis nearly two decades ago:

The logic behind the recession signal is that, as the economy slows, more shoppers shift away from luxury businesses to budget retailers like Walmart. That means a rise in the Walmart Recession Signal could hint that a downturn or a “significant economic slowdown” is on the way, Paulsen said of the indicator.

Walmart, which has long served as a marker for US consumer health, has crushed it in the past year, with its stock up 40% over the last 12 months. It’s gotten a boost from consumers looking to save money as inflation worries have mounted.

Paulsen noted that the Walmart Recession Signal has seen a sharp increase leading up to the past four US downturns. So far this year, it’s climbed about 28 basis points, likely due to economic anxiety surrounding the Iran war, he said.

“The WRS is increasingly advising caution about the US economy,” Paulsen wrote. “My guess is the economy avoids a recession this year, but I am becoming more convinced that a significant US economic slowdown is unfolding,” he added.

Paulsen highlighted several worries he had about the US economy, given the WRS’s recent rise:

• Pain among lower- and middle-income consumers. The recent rise in the WRS suggests that lower- and middle-income households may be facing more financial pressures, Paulsen said.

  “Stress throughout the economy is growing from the bottom part of the income distribution and even if private financial health is sustained, the economy could still suffer a period of notably subpar real growth,” he added.

• Private credit problems. The WRS has historically been closely linked to the value of private credit assets, Paulsen noted. Concerns about the health of the private credit sector have also been rising in recent months as asset managers face a wave of withdrawal requests.

  “The most recent surge in the WRS may correctly be signaling growing trouble in the private credit markets,” Paulsen said.

• Job market pain. The WRS has also been historically linked with the unemployment rate, Paulsen said, citing his analysis of the recession signal and the jobless rate since 1990.

  “During the late-1990s, the WRS rose substantially long before the unemployment rate finally surged,” he added, suggesting that the recent rise in the WRS may not yet be reflected in unemployment figures.

Though the US economy has areas of resiliency, Paulsen pointed to certain vulnerabilities, such as the recent slowdowns in hiring, housing activity, and consumer spending.

“My guess is the WRS is pointing to a significant weakening in real economic activity which could become more obvious during the next several months,” he said, though he speculated that if the Iran war were to see a quick resolution, the US could avoid a recession this year.

Recession calls have grown louder the longer the Iran war has dragged on. Goldman Sachs and BCA Research are among those on Wall Street who have nudged their 12-month recession probabilities higher, largely due to the knock-on effects of the recent oil spike.