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The Wal-Mart Indicator: Great for Wal-Mart, Bad for You

Written by Gary North on December 22, 2011

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.

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2 thoughts on “The Wal-Mart Indicator: Great for Wal-Mart, Bad for You

  1. TheThinMan says:

    Walmart's quality of goods – except for brand names – is poor. ALL of their prices have gone up including their own branding of "Great Value". In the supercenters, ones with grocery departments, their GV icecream is the same price as Breyers. They have also cut back on name brands and now instead of three or more choices, it's usually either GV or the brand they have been able to make the best deal with. They are still lower than any nearby grocer and often you can save between 50¢ and a dollar or more on any given product. At least at the local Super Center, the shelves used to be fully stocked almost all the time and the stocking went on even during peak shopping times to keep it that way. Now, you can often find empty or sparsely filled shelves. You used to have to hunt for a parking spot, now more often than not, parking is within 10 cars near the doors. This local store used to be one of the top 10 in the southeast. After Walmart put several small grocers and other small businesses out of business with their volume low prices, they have dumped departments, like the fabric and craft area, the shoe department is almost completely sport shoes, the seafood department is essentially gone, the bakery (which was actually quite good) now imports frozen dough and pastries and just thaws them and puts them in the oven, almost all their produce comes from Mexico or Chile. I suppose as the economy continues to collapse – Walmart will stay in business because they can still depend on their volume buying to keep prices lower than smaller chains.