What does Walmart know?

SPEAKER_1 (0:01)

Bonds are back.

And so is All the Credit, P. Jim Fixed Incomes Monthly Podcast Series. From the latest trends to long-term perspectives, you'll get timely fixed income insights from leading economists, research analysts and investment professionals. Whether you're new to bonds or a seasoned investor, tune in to All the Credit wherever you get your podcasts. This podcast is intended solely for professional investor use. Past performance is not a guarantee of future results.

Ethan Wu (0:36)

Thank Pushkin, Walmart, America's biggest retailer, is worried about the US consumer. The stock fell 7%, despite pretty good earnings, because of scary guidance. Today on the show, we ask, Walmart, what are you trying to tell us?

This is Unhedged, the markets and financial for the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined today by Walmart warrior, Robert Armstrong.

Robert Armstrong (1:07)

I did want to just say at the top, I love Walmart. I love going to Walmart. They don't have Walmarts here in New York city.

And so whenever I am out in the wild, beyond the five boroughs, and I drive by a Walmart, I stop the car and I go in there. They got everything there. They got hunting equipment, they got furniture, they got food. It's like a paradise, it's an earthly paradise.

Ethan Wu (1:33)

I'm just imagining you, like, with your explorer's hat and machete, cutting through the thicket to emerge into the Walmart.

Robert Armstrong (1:39)

New Jersey.

Ethan Wu (1:41)

Well, we are interested in Walmart, principally because they have a finger on the pulse of what's going on with the US consumer.

Robert Armstrong (1:48)

Most important retailer in the country, no question about it.

Ethan Wu (1:51)

Yes. And they just reported earnings today.

They did fine on the revenue, on profits. They did great, they beat expectations. However, the stock fell because in the earnings call itself, the CEO and the CFO had some rather worrying things to say about the future and about the consumer.

Robert Armstrong (2:08)

Let's hear a couple of those.

Ethan Wu (2:09)

I just want to read a couple choice excerpts. The trend we saw in the back half of October was different than anything else we've seen this year. That made us pause and kind of rethink the health of the consumer.

In the US, we may be managing a period of deflation in the months to come. We're seeing credit tightening. We're in a period of time, 12 months after the Fed has begun raising rates. We've seen consumer balance sheets that are getting close to pre-pandemic levels. We've got the repayment of student loans, which affects about 27 million Americans.

There's a lot there, and none of it is particularly encouraging.

Robert Armstrong (2:40)

You know what I don't like about it, Ethan?

Ethan Wu (2:42)

Yeah.

Robert Armstrong (2:42)

It really risks making us look stiff.

Ethan Wu (2:46)

Most importantly.

Robert Armstrong (2:48)

Because just a week or so ago, we were making a case for the great strength of the, not the great strength, the continued strength of the American economy. You know, we were talking about how, yes, there is tightening. Yes, the housing market is frozen. Yes, savings are going down, but look at all the good stuff. And one of the main good things we were talking about is a persistently strong consumer.

And we were talking, and all these things were true, and I think remain true. We have seen in recent years, very strong balance sheets. Yes. Of American household balance sheets have gotten stronger. Note, especially at the low end of the economy, we have seen wages that are strong enough to keep pace with or even outpace inflation. We have an unbelievably low unemployment rate at 3.9% or whatever it is.

And we've seen the consumer basically keep GDP growing at an above trend rate. Up until now, in the third quarter.

Ethan Wu (3:54)

Speaking of making us sound stupid, that's why we and everyone else got the recession call wrong last year is the consumer was indefatigable, just strong again and again and again.

Robert Armstrong (4:04)

Right, and so having had this little celebration of how wonderful thing everything is last week, we wake up this morning and Walmart is telling us we're wrong again, that the consumer is slowing down. So my first question is, did we misread all that data?

Ethan Wu (4:22)

Yeah.

Robert Armstrong (4:23)

I would also ask, were there other clues out there that we somehow missed that would have told us about a softening consumer?

Ethan Wu (4:29)

Yeah, did we misread the data?

I don't think so. I think it may just be that we're seeing potentially a pivot point now in the strength of the consumer. And we have seen, I think, some leading indicators of that weakness developing, especially in how consumers, especially at the lower end of the income spectrum, are dealing with delinquencies.