3 States Where Holiday Spending Has Fallen the Most

Consumer spending appears to be softening heading into the holidays: a Clever Real Estate survey found 68% of Americans reporting financial strain, 56% cutting back on holiday spending to cover essentials and 38% anxious about affording gifts. SmartAsset’s compilation of U.S. Census retail sales data shows the largest year-end holiday spending declines from 2021–2024 in Vermont (2024: -8.20%), Wyoming (2024: -3.00%) and New Jersey (2024: -1.90%), with tariffs, layoffs, a temporary government shutdown and delayed SNAP benefits cited as contributing factors. The data signal regional pockets of consumer weakness that could pressure consumer discretionary and retail revenues heading into the next quarter.

Analysis

Market structure: Lower holiday spending concentrates wins for discount and staple channels (dollar stores DG/DLTR, Walmart WMT, Costco COST, staples XLP) and hurts specialty discretionary (mall and apparel chains, XRT constituents like BBY/GPS/KSS). Tariff-driven cost passthrough reduces discretionary volumes and shifts pricing power toward retailers that can private-label or bulk-buy; expect 5–15% share gains for deep-discount channels in worst-hit states over 6–12 months.

Risk assessment: Immediate risk (days–weeks) is larger-than-expected same‑store sales prints and inventory markdowns that trigger earnings revisions in Jan–Feb 2026; short-term (3–6 months) risks include renewed tariffs or SNAP/benefit disruptions that further compress low-income demand. Tail risks: a broader consumption shock causing a 50–100 bps hit to GDP growth or a tariff escalation that raises COGS 3–7%, which would pressure margins across retail and lift volatility in consumer credit and regional bank names.

Trade implications: Tactical posture is to reduce exposed discretionary beta and rotate into staples/discount retailers and IG bonds. Implementable strategies: short XRT or buy puts to express structural discretionary weakness, long DG/DLTR and COST for share-gain resilience, and increase XLP/LQD to hedge lower inflation expectations; execute within 2 weeks and reprice after Jan retail prints.

Contrarian angles: Consensus may overstate permanent demand loss—histor precedents (2018 tariff blips) show normalization in 6–12 months as consumers reallocate to services and staples, benefiting AMZN and COST rather than full-sector collapse. Mispricings: high-quality retailers with clean inventories (COST, WMT) may be under-owned; unintended consequence: tighter consumer budgets accelerate private‑label penetration improving margins for discounters over 12–18 months.

Key Decisions for Investors

• Establish a 2.0% long position in Dollar General (DG) for 6–12 months — expect 10–20% relative outperformance vs XRT if share-shift to dollar channels continues; add on any drawdown >6% with stop-loss at -12%.
• Initiate a 1.5% short position in SPDR S&P Retail ETF (XRT) for 3 months to capture near-term markdown risk and earnings revisions; cover or reassess after Jan–Feb 2026 same‑store sales and retailer earnings reports or if XRT rallies >6% from entry.
• Run a 1.5% pair trade: long COST (Costco) and short KSS (Kohl's) equally sized for a 6–12 month horizon — target relative spread capture of 15–25% if consumers favor membership/discounters over department stores; exit if COST underperforms its sector by >8%.
• Buy downside protection via options: purchase XRT Mar 2026 put spread sized to hedge ~50% of discretionary exposure (buy upper strike, sell ~20% lower strike) to limit theta loss while retaining downside insurance ahead of Q4 retail prints.
• Reduce mall/department-store REIT and apparel exposure (e.g., cut SPG/KSS positions by ~30% within 60 days) and redeploy proceeds into consumer staples ETF XLP (+3% portfolio) and investment‑grade corporate bonds LQD (+2%) to protect cash flows if consumer retrenchment persists.