Higher interest rates are on everyone’s mind — but one under-the-radar recession signal suggests Fed rate cuts could be around the corner.
Longtime Wall Street strategist Jim Paulsen, the former chief investment strategist of The Leuthold Group, says the US economy is heading for a slowdown. Eventually, economic weakness may prompt the central bank to slash rates, Paulsen said, pointing to one economic indicator in particular: the Walmart Recession Signal, which measures Walmart’s stock price to a global basket of luxury stocks.
Jim Paulsen
It’s a reflection of “economic stress” and consumer weakness Paulsen said, as Walmart’s stock tends to outperform luxury stocks when US shoppers are tightening their budgets and turning to discount retailers.
The gauge has also historically been a reliable signal for when the US economy is headed toward a recession and when the Fed is about to dial down interest rates to prop up growth.
The Walmart Recession Signal has spiked leading up to the last four recessions, and a spike has also preceded every Fed easing cycle since 1990, Paulsen said, citing his analysis of Walmart’s relative performance and the Fed funds rate.
The Fed recently embarked on a fresh tightening cycle, lifting its target rate by 25 basis points in September. Central bankers have signaled they’re looking to keep a lid on inflation, given the recent strength in the labor market and inflationary pressures stemming from higher oil prices.
While Walmart’s stock has underperformed from May to August of this year, “signaling improved consumer health,” that appears to have changed recently. Since August, Walmart has outpaced the S&P 500 Global Luxury Stock Price Index by around 21%, Paulsen estimated, suggesting consumers have changed their habits in recent months. Walmart shares are up 8% from their low in late August.
“The relative performance of Walmart’s stock is telling a different story. One of renewed economic weakness in the coming months which could force policy officials to return to accommodative actions and once again begin cutting the Funds rate,” Paulsen wrote in a Substack note on Monday.
“The WRS is but a single indicator and is not necessarily the definitive voice. Nonetheless, its historical ability to lead real GDP growth, the unemployment rate, and Federal Reserve actions has been instructive and probably should not be ignored,” he added.
