Stocks Mixed on Sluggish US Retail Sales News

U.S. markets were mixed as weaker-than-expected December retail sales (0.0% m/m vs +0.4% expected) and a softer Q4 employment cost index (+0.7% q/q vs +0.8% expected) pushed 10-year yields down to ~4.15% (a 3-week low) and reinforced odds of Fed rate cuts, with swaps pricing a ~22% chance of a 25bp cut in mid-March. Q4 earnings remain a tailwind—79% of the 297 S&P reporters beat expectations and Bloomberg Intelligence cites +8.4% S&P earnings growth—while individual movers included Datadog (+~14%), Spotify (+~15%) and Ichor (+~31%) on upside, and Goodyear (-~13%), Xylem and S&P Global with notable misses/weak guidance. Treasury supply (a $58bn 3-year auction) and mixed macro prints kept gains in check, leaving a dovish macro backdrop that could influence positioning into upcoming payrolls, CPI and continued earnings releases.

Analysis

Market structure: Weaker-than-expected Dec retail sales and a soft Q4 ECI combine to favor rate-sensitive assets and quality revenues (services/SaaS) while pressuring goods-linked capex and memory/storage suppliers. Direct winners: long-duration Treasuries and high-quality software/recurring-revenue names (DDOG, CRDO, MAR); direct losers: AI-infrastructure and memory/storage (STX, WDC, MU, LRCX) due to inventory and near-term demand risk. Treasury supply ($58B 3yr today; $125B refunding this week) is a cap on a sustainable bond rally.

Risk assessment: Tail risks include a sharper consumer retrenchment that forces multiple compression (GDP/Q1 downside), a failed/soft Treasury auction that spikes yields >4.6%, or sticky services inflation preventing Fed cuts. Near-term catalysts (next 7–30 days): Jan payrolls, CPI, and large earnings from mega-caps; medium-term (1–3 months): guidance revisions from tech capex plans; long-term (3–12 months): hyperscaler AI spend restoring memory demand or prolonging inventories. Hidden dependency: memory and storage demand is a function of hyperscaler capex cadence, not broad consumer retail.

Trade implications: Tilt portfolios to duration for 3–6 months while selectively long high-quality software and travel names that beat/guided up (buy DDOG, CRDO, MAR). Implement targeted shorts/put structures on STX and WDC to capture inventory-led downside; use small, defined-risk option spreads into CPI. Pair trades: long DDOG (1.5%) vs short SMH (1.5%) to express secular software strength vs cyclic semiconductor exposure.

Contrarian angles: The market is pricing a Fed-cut narrative; that overlooks heavy Treasury issuance risk and possible Q4 GDP revisions — duration rallies may be faded. Conversely, the AI-infra selloff may be overdone relative to 12–24 month secular demand; selective long exposure to companies with confirmed hyperscaler demand (ICHR, CRDO) could outperform. Historical parallels: 2019 dovish pivot lifted multiples, but 2022–23 inventory cycles show capex rebounds can lag 6–12 months, so time positions accordingly.

Key Decisions for Investors

• Establish a 3% portfolio position long 7–10y Treasuries via IEF (or equivalent futures long 10y) with a time horizon of 3–6 months; add another 1–2% if 10-year yield breaks below 4.00%. Trim/stop-loss if 10-year yield rises above 4.60% (cut to zero).
• Initiate defined-risk bearish trades on AI-infra/memory: buy 6–12 week put spreads on STX and WDC sized 1% of portfolio each (e.g., buy 1–2% OTM puts and sell deeper OTM puts) to capture near-term inventory-led downside while limiting premium paid.
• Build a 1.5–2% long position in Datadog (DDOG) and 1% in Credo Technology (CRDO) to play strong Q4 results/guidance; target +10–20% upside in 3 months, set tactical stop at -8% to limit drawdown.
• Enter a pair trade: long MAR 2% vs short WCC 1.5% (or short WCC equity) to express travel/quality consumer services resilience vs industrial distribution weakness; target spread tightening of 8–12% over 3 months, stop if MAR falls >10% on idiosyncratic news.
• Purchase discretionary, low-cost volatility hedges ahead of CPI: allocate 0.5% to a 1-month ATM SPY straddle (or call + put) and 0.75–1% to 3-month SPY 5% OTM puts as tail insurance; increase protection if payrolls miss consensus by >50k or unemployment ticks up >0.2ppt.