U.S. recession gauge points to possible Fed rate cuts

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U.S. recession gauge and Fed cuts

Highlights

Walmart’s stock has outperformed the S&P 500 Global Luxury Stock Price Index by 21% since August, signaling increased consumer caution and economic stress.
Jim Paulsen notes that the Walmart Recession Signal historically spiked ahead of the last four U.S. recessions and every Fed rate-cutting cycle since 1990.
The Fed raised its target rate by 25 basis points in September, but Walmart’s relative strength now suggests mounting risk of policy easing if growth slows.

Walmart-luxury stock gap signals slowdown risk

As reported by Business Insider, former Leuthold Group chief investment strategist Jim Paulsen says the so-called Walmart Recession Signal is again flashing concern for the U.S. economy. He defines the gauge as Walmart's stock performance relative to a global basket of luxury shares, arguing that stronger Walmart performance reflects rising economic stress and weaker consumer demand.

Paulsen says the indicator has spiked before the last four recessions and has also preceded every Fed easing cycle since 1990, based on his analysis of Walmart's relative performance and the federal funds rate. In a Substack note published Monday, he writes that the recent move suggests renewed economic weakness in the coming months could push policymakers back toward accommodative action and rate cuts.

He adds that the signal is only one indicator and not a definitive forecast. Still, he says its past ability to lead changes in real GDP growth, unemployment and Federal Reserve policy means it should not be ignored.

Rate outlook shifts as consumer patterns change

The reading comes after the Fed recently starts a new tightening cycle, raising its target rate by 25 basis points in September. Central bankers are signaling that they want to keep pressure on inflation, citing labor market strength and inflation risks linked to higher oil prices.

Paulsen says Walmart stock underperforms from May to August, a period he describes as a sign of healthier consumers. Since August, however, Walmart has outpaced the S&P 500 Global Luxury Stock Price Index by about 21%, while Walmart shares are up 8% from their late-August low, suggesting households are becoming more cautious in their spending habits.

That shift matters for investors because Walmart's relative strength has often coincided with a turn toward defensive consumer behavior. If that pattern continues, it could reinforce expectations that slower growth eventually outweighs inflation concerns and brings the Fed closer to cutting rates.

Our earlier article on Frasers increasing its stake in Burberry described how the UK retailer lifted its holding to 7.42% as it accelerates a strategic push into luxury via Flannels and Harvey Nichols. We noted that this dealmaking reflects a broader repositioning in consumer retail, with buyers prioritizing strong brands and expansion potential even as growth and sentiment remain fragile.

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