US retail sales stalled in December as consumers pulled back on spending

December retail sales were essentially flat (after a 0.6% November gain), with core control-group sales — which feed into GDP goods spending — unexpectedly down 0.1%. Eight of 13 retail categories declined, auto-dealer sales fell, and while building materials and sporting goods rose, uneven spending and higher delinquencies (overall loan delinquencies highest since 2017; credit-card 90+ days at 12.7%) point to stress among lower-income households. Employment Cost Index growth slowed to 0.7% in Q4 (the smallest advance since 2021), and severe winter weather clouds the start of Q1, leaving consumption growth at risk of a sharp slowdown despite expected tax-refund support early in the year.

Analysis

Market structure: The December stall signals a rotation from discretionary goods to staples/discount channels and services; winners include consumer staples (PEP) and value apparel/discount retailers, losers are mid/high-end discretionary (LULU, furniture, autos) as pricing power weakens and promotions rise. Supply-side constraints are not the issue—demand softening (control-group -0.1% in Dec) points to excess retail inventory risk and margin compression in apparel/furniture. Cross-asset: weaker goods demand should cap near-term goods inflation, pressuring front-end yields and supporting duration/Treasuries while widening consumer-credit spreads (ABS, subprime auto, credit-card tranches).

Risk assessment: Tail risks include a sharper consumer credit shock (delinquencies >13% trending to 15% would cascade into ABS repricing), an unemployment uptick >0.5 ppt in next two quarters, or a Fed policy pivot that re-prices risk assets; severe-weather distortions create noisy monthly reads. Time horizons: immediate (days) favors volatility trades and event-driven positioning around Feb 20 core goods/services release; short-term (weeks–months) is earnings/guidance season for retailers; long-term (quarters) is credit-cycle deterioration if delinquencies continue upward. Hidden dependencies include tax-refund timing (Feb–Mar) temporarily masking weakness and regional employment pockets driving uneven spend.

Trade implications: Implement defensive/relative-value posture—overweight staples and value apparel, underweight discretionary experiential names; prefer long PEP and LEVI, short LULU and XLY exposure. Use options to express skew: 3–6 month LULU put-spreads to limit cost and buy XLP call spreads or PEP covered calls for income; size initial positions at 1–3% of portfolio with stop-losses at 12–15% and profit targets at 25–35%. Rotate capital into duration (add 2–3% TLT/IEF) and increase consumer-credit hedges (buy protection via HY-CDS or long HYG puts) if monthly control-group prints fall another -0.3%+.

Contrarian angles: Consensus assumes temporary weather/noise; if Feb 20 real spending print (goods+services) remains negative or control-group prints move -0.5%+ at quarterly pace, risk of sustained discretionary repricing is underappreciated—this would favor owning high-quality, low-volatility staples and long-duration bonds. Conversely, if tax refunds + stimulus lift consumption in Mar by >1% month-on-month, short discretionary could be oversold—avoid all-in shorts pre-tax refund. Historical analog: 2015–16 retail downcycles saw durable winners in staples/value and outsized rebounds in discounted apparel after inventory clearance; size positions to reflect asymmetric payoff windows (3–6 months).

Key Decisions for Investors

• Establish a 2.5% long position in PEP (PepsiCo) and overweight XLP by 2% within 1–4 weeks as defensive exposure; target +20–30% upside from multiple expansion if consumer staples re-rate on slowing goods inflation, stop-loss 12%.
• Initiate a pair trade: long LEVI 1.5% and short LULU 1.5% (3–6 month horizon); add to the short if monthly control-group sales decline >0.3% or LULU EPS guide-down >3%; set pair stop at 15% loss and take profits at 30% net gain.
• Buy 3–6 month LULU put-spread (e.g., buy 10% OTM put, sell 20% OTM put) sized to 1% portfolio risk to cap downside exposure; simultaneously sell 1–2% covered calls on PEP or buy a PEP 3-month call spread to fund cost if volatility remains elevated.
• Increase duration hedge: add 2–3% allocation to long-duration Treasuries (TLT or long 10–30y direct) immediately and expand to 5% if CPI/core goods prints fall meaningfully (core PCE/core CPI decline >0.3 ppt month-on-month) or retail control-group prints drop another -0.5%.