U.S. Retail Sales Unchanged In December

The Commerce Department reported U.S. retail sales were virtually unchanged in December after a 0.6% rise in November, missing consensus expectations of a 0.4% increase. Excluding motor vehicle and parts dealers, retail sales also remained flat in December versus a 0.4% gain in November, while ex-auto sales had been expected to rise 0.3%. The downside surprise to monthly consumer spending may temper near-term growth forecasts and could modestly influence market expectations for economic momentum and policy sensitivity.

Analysis

Market structure: Flat December retail sales implies demand softening for discretionary goods while staples and value retailers gain relative pricing power. Winners: Walmart (WMT), Costco (COST), Dollar stores (DLTR) and grocery/essentials; Losers: specialty/high-end discretionary (RH, LULU), mall operators (SPG, MAA) and retailers with inventory exposure. Supply/demand: likely inventory build and discounting ahead, pressuring gross margins by ~100–300bps for vulnerable players over the next 2–3 quarters.

Risk assessment: Tail risks include a sharper consumer-credit stress event (delinquencies >150bp above current levels) or a Fed move misread that re-prices rates higher, which would amplify retail pain; low-probability upside is a services-led consumer rebound. Time horizons: immediate (days) = equity repricing/option vol spikes, short-term (weeks–months) = earnings-guide cuts and promotions, long-term (quarters) = durable shift to services and margin compression. Hidden dependencies: auto volatility, holiday return patterns, and inventory accounting can mask true demand; catalysts: Jan earnings (WMT, TGT, COST), CPI/PCE and weekly jobless claims.

Trade implications: Favor defensive consumer staples and duration; tactically overweight COST (2–3% position) and WMT (1–2%) and add 3–5% allocation to long-duration Treasuries (TLT or 7–10yr ETFs) over the next 1–3 months. Short-select discretionary / mall-exposed names (RH, M) or a 1–2% hedge via short XLY if retail sales remain flat for 2 consecutive months. Options: buy 3-month put spreads on RH (sell-to-buy 10%/30% OTM) to limit cost and capture downside if guidance weakens; consider protective collars on high-beta retailers.

Contrarian angles: Consensus treats flat goods sales as broad consumer weakness but understates services strength (travel/dining) which can offset goods weakness and generate selective rebounds in omni-channel retailers (AMZN, TGT). The market could overreact to one month; historical parallels (2015–16 inventory destock) show 3–6 month washouts followed by selective recoveries. Watch for an aggressive promotional cadence — if margins compress >200bps and comps worsen for two quarters, the sell-off is justified; conversely, two consecutive ex-auto months >+0.5% should trigger covering shorts within 2 weeks.

Key Decisions for Investors

• Establish a 2.5% portfolio long position in COST (Costco) and a 1.5% long in WMT (Walmart) within 1–2 weeks to capture defensive volume upside; trim if same-store sales/margin beats by >150bp on next quarterly reports.
• Allocate 3–5% to long-duration Treasuries (TLT or IEF for 7–10yr exposure) over the next 1–3 months to hedge growth disappointment; trim positions if 10yr yield rises above 3.75% on sustained inflation prints.
• Initiate a 1–2% short or hedge via short XLY ETF (consumer discretionary) or direct short positions in RH (1% notional) and Macy's (M, 0.5%) to capture downside from margin risk; cover if two consecutive ex-auto monthly retail prints exceed +0.5%.
• Buy a 3-month RH put spread (buy 10% OTM put, sell 30% OTM put) sized to 0.5–1% of portfolio to limit premium outlay while capturing downside from likely guidance cuts; exit or roll if RH stock falls >25% or earnings guide confirms weakness.