"Walmart decline signal" lit up a red light, is the decline really coming?
Analysis believes that the current 'Walmart Recession Signal' cannot accurately predict the recession. First, the index selected for this indicator itself is controversial. Second, the trend of the luxury goods industry is changing, putting overall pressure on the industry. Third, Walmart's own business model is also continuously evolving, shifting towards expanding high-margin businesses.
In the repeated warnings of economic recession, the US economy continues to show resilience. Will this 'Walmart recession' signal also become ineffective?
Currently, the 'Walmart Recession Signal' (WRS) is at its highest level since the early stages of the epidemic, sounding the recession alarm. Walmart's stock price has been soaring this year, rising by 80%, while the S&P Global Luxury Goods Index has remained largely unchanged, with this indicator showing a significant increase.
The 'Walmart Recession Signal' was proposed by former Wells Fargo & Co asset management strategist Jim Paulsen, this indicator predicts economic recession risks by comparing the performance of Walmart (WMT.US) stock prices with the luxury goods stock index.
Paulsen believes:
As economic activities slow down and recession risks intensify, retail purchasing patterns tend to gravitate towards discount stores like Walmart, moving away from luxury goods retailers. Therefore, the rise of WRS may indicate potential recession.
However, can this indicator really predict economic recessions?
The three major limitations of the 'Walmart Recession Signal'
According to media reports on Thursday, a deeper analysis revealed that this indicator has some limitations.
First, the standard used by WRS - the S&P Global Luxury Index itself is controversial. The index uses a complex weighting calculation method, dividing constituents into four categories - lowest, medium, significant, or maximum - and then correspondingly reducing their market caps. S&P not only considers market cap but also introduces a subjective 'luxury exposure score'.
This results in significant differences in the index constituents, ranging from pure luxury brands to high-end hotels, cruise operators, and even companies like Tesla (TSLA.US). Whether such a diverse mix of constituents can accurately reflect the overall trends of the luxury goods industry is debatable.
Secondly, the luxury goods industry itself is undergoing structural changes. Ultra-high-end brands represented by LVMH, Hermes, and Ferrari continue to seize market share, while traditional luxury brands face growth pressure.
However, in the past year or so, the entire industry has fallen into difficulties. Against the backdrop of global economic slowdown, high-end brands are trying to raise prices, and more and more evidence shows that Generation Z is not so concerned about genuine branded products. These trends in the luxury goods sector are presented in various ways, which cannot be easily summarized by a single index.
In addition, Walmart's own business model is also evolving. The company has recently attracted more high-income consumers and actively expanded its international retail and high-profit e-commerce business. In 2023, Walmart's stock price surged by nearly 90%, mainly due to business expansion and improved profitability, rather than simple sales growth.
Paulson recently stated in his Substack column that there are no signs of recession panic in corporate credit spreads. If not for strange indexes and complex industries, his Walmart recession signal might also convey the same meaning.
"Sam's Rule" and other traditional forecasting indicators have also failed.
Through the analysis above, it can be seen that due to structural changes in the industry, the "Walmart recession" signal seems to be unable to accurately predict a recession.
Not only this indicator, traditional forecasting indicators such as “Sam's Rule” have also failed. Claudia Sahm, the proposer of “Sam's Rule”, previously announced that “Sam's Rule” has been somewhat ineffective and cannot prove that the U.S. economy has entered a recession.
The reason for the failure is due to structural changes in the labor market. Sahm believes that the rise in unemployment is no longer due to a weakening demand for workers in the market, but rather due to an increase in labor supply. For example, the surge in U.S. immigrants after the epidemic has promoted the recovery of the job market, causing the unemployment rate to rise, and it can no longer be used as a reference for a recession indicator.
In the repeated warnings of economic recession, the US economy continues to show resilience. Will this 'Walmart recession' signal also become ineffective?
Currently, the 'Walmart Recession Signal' (WRS) is at its highest level since the early stages of the epidemic, sounding the recession alarm. Walmart's stock price has been soaring this year, rising by 80%, while the S&P Global Luxury Goods Index has remained largely unchanged, with this indicator showing a significant increase.
The 'Walmart Recession Signal' was proposed by former Wells Fargo & Co asset management strategist Jim Paulsen, this indicator predicts economic recession risks by comparing the performance of Walmart (WMT.US) stock prices with the luxury goods stock index.
Paulsen believes:
As economic activities slow down and recession risks intensify, retail purchasing patterns tend to gravitate towards discount stores like Walmart, moving away from luxury goods retailers. Therefore, the rise of WRS may indicate potential recession.
However, can this indicator really predict economic recessions?
The three major limitations of the 'Walmart Recession Signal'
According to media reports on Thursday, a deeper analysis revealed that this indicator has some limitations.
First, the standard used by WRS - the S&P Global Luxury Index itself is controversial. The index uses a complex weighting calculation method, dividing constituents into four categories - lowest, medium, significant, or maximum - and then correspondingly reducing their market caps. S&P not only considers market cap but also introduces a subjective 'luxury exposure score'.
This results in significant differences in the index constituents, ranging from pure luxury brands to high-end hotels, cruise operators, and even companies like Tesla (TSLA.US). Whether such a diverse mix of constituents can accurately reflect the overall trends of the luxury goods industry is debatable.
Secondly, the luxury goods industry itself is undergoing structural changes. Ultra-high-end brands represented by LVMH, Hermes, and Ferrari continue to seize market share, while traditional luxury brands face growth pressure.
However, in the past year or so, the entire industry has fallen into difficulties. Against the backdrop of global economic slowdown, high-end brands are trying to raise prices, and more and more evidence shows that Generation Z is not so concerned about genuine branded products. These trends in the luxury goods sector are presented in various ways, which cannot be easily summarized by a single index.
In addition, Walmart's own business model is also evolving. The company has recently attracted more high-income consumers and actively expanded its international retail and high-profit e-commerce business. In 2023, Walmart's stock price surged by nearly 90%, mainly due to business expansion and improved profitability, rather than simple sales growth.
Paulson recently stated in his Substack column that there are no signs of recession panic in corporate credit spreads. If not for strange indexes and complex industries, his Walmart recession signal might also convey the same meaning.
"Sam's Rule" and other traditional forecasting indicators have also failed.
Through the analysis above, it can be seen that due to structural changes in the industry, the "Walmart recession" signal seems to be unable to accurately predict a recession.
Not only this indicator, traditional forecasting indicators such as “Sam's Rule” have also failed. Claudia Sahm, the proposer of “Sam's Rule”, previously announced that “Sam's Rule” has been somewhat ineffective and cannot prove that the U.S. economy has entered a recession.
The reason for the failure is due to structural changes in the labor market. Sahm believes that the rise in unemployment is no longer due to a weakening demand for workers in the market, but rather due to an increase in labor supply. For example, the surge in U.S. immigrants after the epidemic has promoted the recovery of the job market, causing the unemployment rate to rise, and it can no longer be used as a reference for a recession indicator.
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Investment needs to be cautious, and entering the market is risky.
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