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Wal-Mart’s Troubles May Be Canary in a Coal Mine

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Wal-Mart’s (WMT) surprise drop in sales caused considerable tension in the market, as stocks took their biggest five-day tumble of the year last week. This unsettling news could have serious ramifications for investors of every stripe. So what gives?

Wal-Mart’s recent trouble may be due to lower income consumers having trouble with cash flow. During the same quarter, car sales have been very strong, as has consumer discretionary spending. It may be that people are simply putting their money elsewhere.

Or, the problem may be with Wal-Mart itself. The company has been criticized for years about the dismal conditions at its stores, poor wages and declining customer satisfaction. According to Bloomberg Businessweek, Wal-Mart placed last among discount stores in the American Customer Satisfaction Index, the sixth year in a row the company has either tied or taken the last spot. It could be that shopping at Wal-Mart just isn’t fun anymore.

Finally, the economy could be foundering. Worries over rising rates have caused headaches in the mortgage market and made corporate purchasers pull the breaks on future expenditures. The resulting uncertainty should naturally put a dent in the willingness of consumers to spend.

So which of these scenarios are most likely? We probably won’t know until next quarter’s earnings come out, and as a result, the buying and selling you’ll be seeing in the meantime are traders positioning for the most obvious outcome. Those with short-term objectives may want think about buying at the low end of the range and selling tops for the next few months. Longer-term investors will want to take a serious look at their holdings with an eye toward capital preservation and portfolio risk levels as the scenario unfolds.