Did you know that Walmart's stock can sometimes predict an upcoming recession more accurately than traditional economic indicators?

As surprising as it sounds, the retail giant's performance has proven to be a valuable signal for economic shifts, highlighting the importance of unconventional metrics in market analysis.

In this edition of our newsletter, we look into these three topics:

• The Lagging Dow: First, despite the overall market surge, the Dow Jones Industrial Average has been struggling 📉

• How Buffett Has Kept Control Of Berkshire After Unloading Over Half His Stock: Next, Warren Buffett's strategic maneuvers have allowed him to maintain control over Berkshire Hathaway 🏛️

• How Walmart Stock Can Predict The Next Recession: Finally, we’ll explore how Walmart's stock price, when compared to luxury goods indices, can serve as an early warning system for economic downturns 🔮

Stay informed and ahead of the curve with our in-depth analysis and expert insights. Happy investing!

The Lagging Dow 📉

The Dow reached a peak of 40,000 on May 17 and since then it has slid 3.5%.

It’s been a broad-based decline, with 19 of the 30 Dow components falling so far this month.

So why has the Dow faltered even as the other major market indexes keep powering higher?

The disconnect is almost amusing to those not invested in funds pegged to the Dow 🤭

Chalk it up to both a combination of the Dow’s unique price-weighted approach – both the S&P 500 and Nasdaq are market-cap weighted.

There’s also the fact the Dow’s heavily laden with rate-sensitive financial stocks, which have tumbled along with long-term bond yields.

American Express stock is the biggest laggard in the Dow in June, down more than 6%.

Shares of Travelers and JP Morgan Chase are the fifth- and sixth-worst performers.

Goldman Sachs stock has slid this month as well.

Financials aren’t the only struggling Dow stocks, though 😳

Other companies in more value-oriented, cyclical sectors have been hit, too.

Chevron is the second-worst Dow stock in June.

Shares of Disney, Caterpillar, and Verizon are also sandbagging the index.

The big winners in the Dow on the other hand are largely in tech 💻

Shares of Apple, Microsoft, and Amazon are the top three performers.

But these are also the big market-cap-weighted stocks lifting the S&P 500 and Nasdaq…and they don’t have as much impact on the daily swings of the Dow, which is exposed to the stock prices of the individual components.

Sure, Microsoft has the third largest price weighting.

But Apple and Amazon are only the 11th and 15th largest Dow components respectively.

That means that their big gains this month aren’t enough to offset the fact that nearly two-thirds of the Dow components have fallen in June, including heavily weighted Dow stocks Goldman, Caterpillar, Amgen, and McDonald’s.

There has been a narrow surge but the market may be reaching a point where the rally could broaden out.

Nevertheless, large-cap-growth sectors such as technology and communications services are continuing to innovate, have low levels of debt, and generate significant cash flow 💰

This should insulate them from any concerns about the Fed possibly leaving interest rates unchanged until December…if not longer.

Tech is delivering on earnings.

As long as they continue to do so, this should be a good.

How Buffett Has Kept Control Of Berkshire After Unloading Over Half His Stock 🏛️

Warren Buffett has given away more than half of his stock in Berkshire Hathaway under a philanthropic program initiated in 2006, but his control of the company is as airtight as ever.

The reason is that most of the ownership of Berkshire has migrated to lower-vote Class B shares since their creation in 1996.

Buffett’s stake is almost entirely concentrated in the Class A stock, which offers far more votes per share 🗳️

Given Buffett’s stature, it is unlikely that any investor would challenge him on a major decision even if he didn’t have voting control of the company.

But Buffett is taking no chances 🙅🏻

The arrangement he has set up should allow his three children to exercise considerable sway at Berkshire after Buffett’s death.

Buffett, the conglomerate’s 93-year-old CEO, held 216,637 Class A shares in March, based on Berkshire 2024 proxy statement.

That amounts to a 15.1% economic stake in the company worth about $133 billion with the stock up 0.5% to $613,860 Monday.

Buffett’s voting interest, however, is double that at 31.2% 🤯

That is because he owns almost 40% of the Class A shares outstanding.

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How Walmart Stock Can Predict The Next Recession 🔮

You can get anything you need at Walmart, even, perhaps, an accurate recessionary signal.

At this point, investors might be shopping for a new one, given so many trusted indicators haven’t panned out in recent years.

The list goes from the inverted yield curve to the Conference Board’s Leading Economic Index to the rapid rise in interest rates from 2022 to 2023.

The problem is that soft economic landings—stocks appear to be pricing one in now—often look like recessions at first, given that both involve weakening economic data.

Investors who incorrectly believe a recession is imminent will position themselves too conservatively, missing out on profits ❌

As an example, anyone who pulled their money out of the market because they were spooked by the S&P 500s pain in April would have missed out on gains in May and the first half of June.

That’s where Walmart comes in, argues Jim Paulsen, Paulsen Perspectives’ chief investment strategist.

Its focus on value-conscious shoppers gives management an excellent view of the financial health of consumers, particularly those with less money, who are often the first to feel the pain of recessions.

But Paulsen says the company has more to offer for recession watchers 👀

A metric he calls his Walmart Recession Signal compares Walmart’s stock price to the S&P Global Luxury Index, aiming to capture the movement when shopping patterns shift toward Walmart and away from more expensive goods as the economy slows and the risk of a recession grows.

Paulsen overlays the WRS, which rises when the economy worsens, with corporate credit spreads, finding that since 2007, the two have moved nearly in tandem.

That isn’t surprising because credit spreads—the difference between yields on corporate and Treasury debt—often widen as recession risks build.

What is really interesting is when the Walmart indicator and credit spreads send different signals 🤔

While both predicted the financial crisis in 2007, in 2015 and 2016 the WRS held firm, while credit spreads widened, pointing to a recession that didn’t arrive.

The Walmart indicator was proved correct again in the second half of 2019, flashing a recessionary warning even as credit spreads didn’t.

And today?

Credit spreads have been tightening all year, Paulsen notes, indicating no real financial pressure and a healthy economy.

Yet the WRS has risen to its highest levels since the 2020 recession.

The last two times, the WRS was right, while credit spreads were wrong 📈

Will the third time prove the rule?

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