Having evolved from merely being a big-box retailing giant to a bona fide one-stop-shop, Walmart (NYSE:WMT) is easily one of the safest long-term investments you can make. However, the ongoing U.S.-China trade war has significantly clouded the narrative for Walmart stock.
Back in July of this year, I warned that the WMT stock price was subject to nearer-term pressure. Any time you have the top two economies face off with each other, the implications are always negative. With Walmart, you can multiply this sentiment five-fold.
Logically, because China provides the lion’s share of Walmart’s cheaply produced goods, a trade war is the last thing the retailing behemoth needs. With angry political rhetoric leading to back-and-forth tariffs, margin pressure may eventually force big changes. This circumstance didn’t bode well for Walmart stock; hence my pensiveness at the time.
And when the company was horrifically “featured” in the El Paso massacre, the headlines were incredibly unhelpful to the WMT stock price. That said, from a pure investment perspective, the real headwind was always the trade war. People have a way of moving on from tragedy. But a trade dispute involving nationalistic undertones? Not so much.
However, despite my understandable caution against Walmart stock, shares eventually defied my conservative approach. Currently, WMT is near its all-time closing high.
How did something so obviously negative for the WMT stock price apparently turn into a catalyst? In my opinion, the trade war dualistically represents the reason why investors should be bullish. If we don’t have a resolution with China, our economy will almost surely fall into a recession.
And under that circumstance, Walmart stock looks incredibly compelling. Here’s why:
A Recession Could Spark an Indefinite Shift to Walmart Stock
One of the best reasons to prepare for a potential recession is that we already have a recent blueprint to work with. Therefore, we can reasonably forecast consumer behaviors in a downturn and how it might affect WMT stock.
During the dark days of the Great Recession, McKinsey & Company investigated how severe economic slumps impact consumer behaviors. Primarily, the research firm discovered two key points that have significant repercussions for Walmart stock, along with the underlying company’s rivals such as Target (NYSE:TGT) or even Costco Wholesale (NASDAQ:COST).
These two points are that economic pressure incentivizes consumers to seek lower-cost goods, and that these same folks later stick with the discounted products even when the economy steadily recovers.
Critically, the reason why consumers prefer sticking with the lower-priced products is that they perceived them to be better-than-expected quality. McKinsey authors Betsy Bohlen, Steve Carlotti, and Liz Mihas wrote:
Normally, the premium-brand product would return to favor as the economy bounced back. But the central implication of our research is that even if the willingness of consumers to pay rebounds as the economy does, changes to their perceptions of the value of lower- and higher-priced products may fundamentally alter what they choose to buy. That’s troubling for consumer-packaged-goods companies whose brands command premiums. If consumers see no legitimate reason to stick with such products, the premiums will slowly erode, and profit margins will shrink until category competition is determined mainly by price.
In other words, if we suffer another recession, Walmart could easily attract shoppers from more premium retail outlets. Of course, this would ramp up the case for Walmart stock. But more importantly, those converted shoppers could stay with WMT after the coast clears.
Why spend more when you don’t have to?
Taking a Tactical Approach to WMT Stock
As I mentioned above, I was cautious on Walmart stock because of the trade war. However, the big-box retailer has so far proven me wrong.
That doesn’t mean, though, that shares can continue to defy the gravitational pull of this worrying geopolitical conflict. Therefore, I’d take a tactical approach to WMT stock. Namely, that involves keeping the powder key dry when shares are elevated as they are now. However, when the equity invariably dips, I’d average-cost these discounts.
I think I’m like most people who refuse to shop at Walmart. No matter which location you go to, Walmart stores always seem to attract an interesting crowd.
But nothing motivates more than the power of money. If financial conditions get rough for millions of American households, they’ll easily become Walmart converts. Longer term, that’s a strong tailwind for Walmart stock.
As the McKinsey study demonstrates, the retailer just might retain those converted customers. Therefore, Walmart could end up winning big even if the rest of us suffer greatly.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.