EWhen Wal-Mart’s stock is rising, it sends a signal. Most people do not understand this signal. This analyst does.
. . . I recently co-hosted Bloomberg Rewind with Matt Miller and referenced the performance of Wal-Mart (NYSE:WMT) relative to the broader stock market and the SPDR S&P Retail Index ETF (NAR:XRT) . The main point I addressed on-air was the idea that Wal-Mart is in many ways the “deflation retailer” and that it has for the year actually performed better than the average retail stock. As of 12/19, Wal-Mart was up 10% for the year with XRT up about 6%. The differential exists largely because of the expectation that relative to other retailers, Wal-Mart would fare better from a fundamental standpoint as more consumers rely on lower prices.
By deflation, he does not mean a falling consumer price index. We have not seen that, year to term since 1955. Presumably, he means retail discounting. That surely is Wal-Mart.
The potential does exist for further outperformance, particularly against broader market averages. This inherently would be bearish in the intermediate-term as it suggests further economic weakness and a retrenching consumer.
How has Wal-Mart’s shares performed in relation to the S&P 500 index? Very well.
Interestingly, Wal-Mart bottomed relative to the S&P 500 (SNC:SPX) in March of this year before European problems exploded on the news. In other words, there seems to have been some anticipation that a deflation scare was coming given that the leadership really began very quietly earlier this year. Since then, the trend in leadership has been fairly consistent and powerful, suggesting that Wal-Mart continues to be an outperformer and that expectations still exist for an economically challenged environment.
The bottom line? A true uptrend in markets should coincide with a break of the relative performance of Wal-Mart. For now, that doesn’t look to be in the cards.
So, which will it be? Wal-Mart or the S&P 500? Which will it be? A recessionary economy or a boom economy?
I think recessionary, despite the Federal Reserve’s QE2 earlier this year. The FED is now in tight-money mode. The banks still are not lending. Small businesses still are not borrowing. This could change. But, for now, things look good for Wal-Mart.