Jim Paulsen has watched four-plus decades of these cycles. Now retired, he dusted off a warning light he built from one simple ratio. It compares Walmart (WMT) shares with a basket of other retailers and, lately, the Global Luxury Index. By the Journal's chart, that line sits near where it stood in the 2008 recession. Spencer Jakab's Heard on the Street column asks what that means for the middle class.
The K-shaped economy is the idea that the well-off keep spending while everyone else cuts back. Jakab says the top of that K is starting to sag. A slice of the middle class is trading down. So far the proof comes from companies, not from government numbers like the jobless rate. Paulsen says the squeeze “might be reaching higher into the income distribution than in the past.” The reason is that the middle class has its own haves and have-nots. One group leans on what it owns, a paid-down house or a stock portfolio at a record. Those families feel safe. The other group leans on a paycheck. The job is still there. The confidence that it will stay is not.
Where the trading-down shows up
Chuck Grom, a retail analyst at Gordon Haskett, says even some middle- to upper-middle-class people “are acting like low-income shoppers lately.” He sees new faces at Dollar General (DG), whose small stores sit close to home when gas is expensive. Warehouse clubs like Costco (COST) and BJ's could gain, along with off-price chains Ross Stores (ROST), Burlington and TJ Maxx. AutoZone and O'Reilly pick up drivers who skip the dealer. Restaurants split too. Darden (DRI), which owns Olive Garden and serves mostly older diners, is doing fine. Chipotle, Sweetgreen and Cava are not. Their young white-collar regulars worry more about their jobs, and they have less home equity and smaller 401(k) balances to fall back on. One more sign of strain. Shares of two pawnshop chains, EZCORP and FirstCash, have jumped this year.
Jakab says the signs are well short of a recession. The catch is what's holding them there. Grom credits the stock market and most housing markets for cooperating. In other words, the middle class is spending partly because its net worth looks good on paper. Friday's retail-sales report in the Journal backs him up. September retail sales rose 0.8%, but only 0.2% once you take out autos and gas, with inflation at 3.7%. We hold Walmart at weight in 12 books, Costco in 20 and Dollar General in 7. TJX Companies (TJX), the owner of TJ Maxx, is in 5, Darden in 4 and Ross in 2. Nothing added this week.
Our read
This is a Cash Flow M5 story with a Behavioral edge. Paulsen's ratio is a crowd price. It tells you how investors feel about a discount chain against luxury, nothing more. What matters more for a household is the split Jakab describes. If your confidence rests on a 401(k) balance and a home price, you're spending from a number that moves. If it rests on a paycheck, you're spending from a number that can stop. Both are fine while stocks and houses hold. The signal says the middle is already acting as though they might not.
So the line in your plan this story touches is the emergency fund, measured against the paycheck and nothing else. This week, take your monthly must-pay costs and divide your cash savings by that number. The answer is how many months you could go without the job. The 401(k) balance doesn't count, because it's the thing that drops in the same storm that takes the job. If the months come out thin, the fix is to build the cushion before any layoff memo. You buy the umbrella on the sunny day. If you'd like us to run that month count with you, it takes one call.