Walmart's stock is outperforming luxury stocks. Why might this signal an upcoming Fed rate cut?

The U.S. economy is heading toward a slowdown, and this could prompt the Federal Reserve to cut rates rather than raise them, as the market expects, according to Jim Paulsen, a Wall Street veteran and former chief investment strategist at The Leuthold Group. According to him, an indicator known as the “Walmart recession signal” points to “economic stress”: shares of the budget retailer are now trading at a higher price than a basket of shares from luxury brand owners, and this could foreshadow a future recession.

The Walmart Recession Signal (WRS) indicator compares the performance of Walmart’s stock to that of the S&P Global Luxury Index, a global index of luxury goods manufacturers, and Walmart’s stock is currently outperforming that index. According to Polsen, this reflects “economic stress” and weakening consumer demand: Walmart’s stock typically outperforms the luxury sector when U.S. consumers start cutting back and switch to discount stores, the investor wrote in a Substack post. In the past, this indicator has been a fairly reliable signal of an impending recession in the U.S. and of the Fed preparing to cut interest rates to support economic growth, Business Insider notes.

The Walmart Recession Signal rose sharply in the run-up to the last four recessions—in 1991, 2001, 2007–2009, and 2020. Since 1990, a spike in the WRS has preceded every cycle of monetary easing by the Fed, Paulsen said, citing his analysis of the relative performance of Walmart stock and the federal funds rate.

In September, the Fed began a new cycle of monetary tightening by raising its target interest rate range by 25 basis points. Central bank officials made it clear that they intend to keep inflation in check amid a strong labor market and inflationary pressures linked to rising oil prices.

From May through August of this year, Walmart’s stock underperformed the luxury goods stock index, which, according to Paulsen, “signaled an improvement in consumer sentiment.” However, the situation appears to have changed recently. Since August, Walmart has outperformed the S&P 500 Global Luxury Stock Price Index by about 21%, according to Polsen’s calculations. This may indicate that consumers have changed their spending habits in recent months. Walmart’s stock has risen 8% from the low it hit in late August.

"The relative performance of Walmart's stock tells a different story. It points to a resurgence of economic weakness in the coming months, which could force policymakers to return to stimulus measures and begin cutting the federal funds rate again,” Paulsen wrote on Substack. “WRS is just one indicator, and it shouldn’t be considered a definitive argument. However, historically, it has done a decent job of anticipating changes in real GDP, the unemployment rate, and Federal Reserve actions, so it’s probably not worth ignoring.”

On October 12, LVMH, one of the largest constituents of the S&P Global Luxury Index, reported a 5% decline in organic revenue for its key fashion and leather goods division in the third quarter. LVMH was the first luxury company to report its third-quarter results, and its performance is likely to fuel doubts that the $350 billion industry will be able to return to growth after three years of slowing demand, Reuters reports.

Since the beginning of the year, shares of the largest U.S. retailer have risen by just 1.3%. On October 12, the research firm Gordon Haskett raised its price target for Walmart from $110 to $135—approximately 21% above the closing price on October 9.

Wall Street has a positive outlook on Walmart stock: 41 analysts covering the stock recommend buying it, six more recommend holding it, and one recommends selling it, according to MarketWatch. The average price target is $128.5, which is 15% higher than the closing price on October 9.

This article was AI-translated and verified by a human editor