Why May Indicators Like The 'Walmart Recession Signal' and Sahm Rule No Longer Apply?

Amidst repeated economic recession warnings, the U.S. economy continues to show resilience. Is this Walmart Recession Signal" also going to fail?

The "Walmart Recession Signal" was proposed by former Wells Fargo Asset Management strategist Jim Paulsen. This indicator predicts the risk of economic recession by comparing the relative performance of Walmart's stock price with the luxury stock index.

Paulsen believes that, as economic activity slows and the risk of recession intensifies, retail purchasing patterns tend to shift towards discount stores like Walmart and away from luxury retailers. Therefore, the rise in WRS may indicate a potential recession.

Currently, the "Walmart Recession Signal" (WRS) is at its highest level since the early stages of the pandemic, sounding the alarm for a recession. This year, Walmart's stock price has soared, rising by 80%, while the S&P Global Luxury Index has remained essentially unchanged, pushing this indicator to increase significantly.

However, can this indicator really predict an economic recession?

According to some analysts, upon closer examination, the indicator has some limitations.

Firstly, the standard used by WRS—the S&P Global Luxury Index—is itself controversial. The index uses a complex weighting calculation method, dividing constituent stocks into four categories—minimum, moderate, significant, or maximum—and then reducing their market value accordingly. S&P not only considers market value but also introduces a subjective "luxury exposure score."

This results in significant diversity in the index's constituent stocks, ranging from pure luxury brands to high-end hotels, cruise operators, and even companies like Tesla. Such a diversified combination of constituent stocks may not accurately reflect the overall trend of the luxury industry.

Secondly, the luxury industry itself is undergoing structural changes. Ultra-high-end brands represented by LVMH, Hermès, and Ferrari continue to capture market share, while traditional luxury brands face growth pressures.

However, over the past year or so, the entire industry has been in trouble. Against the backdrop of a slowing global economy, high-end brands have tried to inflate prices, and more and more evidence suggests that Generation Z is not as concerned with authentic brands. These trends manifest in various ways in the luxury sector and cannot be easily summarized by a single index.

Furthermore, Walmart's business model is also evolving. The company has recently attracted more high-income consumers and actively expanded into international retail and high-profit e-commerce businesses. Walmart's stock price soared nearly 90% in 2023, mainly due to business expansion and improved profitability, rather than just increased sales volume.

Paulson recently stated in his Substack column that there are no signs of recession panic in corporate credit spreads. If not for the strange index and cumbersome industry, his Walmart recession signal might also convey the same message.

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.

It's not just this indicator; traditional predictive indicators like the Sahm Rule are also failing. Claudia Sahm, the proponent of the Sahm Rule, officially announced that the Sahm Rule has somewhat lost its credibility, and it cannot prove that the U.S. economy is already in 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 decrease in market demand for workers but is due to an increase in labor supply. For example, the surge in U.S. immigration after the pandemic has promoted the recovery of the job market, and the rise in unemployment cannot be used as a recession indicator for reference.