Retail Sales Data Trading: How to Trade Consumer Spending Reports

Consumer spending drives approximately 70% of US GDP, making retail sales data one of the most important economic indicators. The monthly retail sales report provides critical insights into consumer health and economic momentum, creating significant trading opportunities.

What Is the Retail Sales Report?

The Advance Monthly Retail Trade Survey, commonly called retail sales, measures total receipts at stores selling merchandise and related services to final consumers. It covers everything from department stores to restaurants to car dealerships.

Key Retail Sales Metrics

Headline Retail Sales

This is the total monthly change in retail sales. It is highly volatile due to auto and gas sales, which fluctuate with prices rather than true demand. Markets react to this number, but it can be misleading.

Retail Sales Ex-Autos

This excludes auto sales, which are volatile and often driven by financing deals rather than economic conditions. It provides a cleaner read on consumer spending.

Retail Sales Ex-Autos and Gas

This excludes both autos and gasoline, providing the cleanest read on core consumer spending. Gas sales fluctuate with oil prices, not true demand.

Control Group

This excludes autos, gas stations, building materials, and food services. It feeds directly into GDP calculations and is arguably the most important number for economists.

What Drives Retail Sales?

Understanding the drivers helps predict retail sales and interpret the data:

Employment and Wages

People cannot spend money they do not have. Strong job growth and rising wages support retail sales. Watch the jobs report released two weeks before retail sales for clues.

Consumer Confidence

Confident consumers spend more freely. Consumer confidence data released before retail sales can help predict the number.

Gas Prices

Lower gas prices leave more money for other purchases. Higher gas prices drain consumer wallets. However, this affects headline more than core measures.

Weather

Severe weather can depress retail sales by keeping shoppers home. Mild weather can boost sales. Weather effects typically reverse in subsequent months.

Seasonal Factors

Holiday shopping (November-December) drives huge seasonal swings. Tax refund season (February-March) also boosts spending. The report is seasonally adjusted, but large seasons can still create noise.

How Markets React to Retail Sales

Stock Market

• Strong retail sales: Positive for consumer discretionary, retail stocks
• Weak retail sales: Negative for retailers, may boost defensive sectors
• Context matters: Strong data can be negative if it means more Fed tightening

Bond Market

• Strong retail sales: Bond yields typically rise (prices fall)
• Weak retail sales: Bond yields typically fall (prices rise)
• Inflation impact: Strong spending may fuel inflation concerns

Currency Market

• Strong retail sales: US dollar typically strengthens
• Weak retail sales: US dollar typically weakens

Trading Strategies Around Retail Sales

Strategy 1: Trade the Surprise

Focus on the difference between actual and expected:

• Identify consensus expectations before the release
• Trade the surprise in the first 5-15 minutes
• Use tight stops as reactions can be volatile and reverse

Strategy 2: Retail Stock Positioning

Position in retail stocks before the release based on your expectations:

• Bullish: Long XRT (retail ETF), individual retailers
• Bearish: Short XRT, protective puts on retail holdings
• Neutral: Straddles or strangles to profit from volatility

Strategy 3: Trend Confirmation

Use retail sales trends for longer-term positioning:

• Three consecutive months of weakness: Consider reducing consumer discretionary exposure
• Three consecutive months of strength: Consider adding to retailers
• Year-over-year trend more important than single months

Sector and Stock Impacts

Different retail categories affect different stocks:

• Building materials: HD, LOW
• Food services: MCD, SBUX, DRI
• General merchandise: WMT, TGT, COST
• Nonstore retailers (e-commerce): AMZN
• Autos: F, GM, AUTO
• Apparel: TJX, ROST, GPS

Common Mistakes When Trading Retail Sales

• Focusing only on headline: Always look at ex-autos and control group
• Ignoring revisions: Previous months are often revised significantly
• Forgetting seasonality: Holiday and tax refund seasons skew data
• Over-trading one report: Single months can be noisy
• Missing Fed implications: Strong data may mean more tightening

Real-Time Spending Indicators

Several sources provide more timely spending data than the official report:

• Credit card data: Banks like JPM and BAC share spending trends
• Redbook: Weekly same-store sales data
• Johnson Redbook Index: Department and discount store sales
• Retailer guidance: Company commentary on spending trends

Summary

Retail sales data provides crucial insights into consumer spending, which drives 70% of GDP. Look beyond the headline number to ex-autos and control group measures for cleaner signals. Consider employment, confidence, and gas prices when predicting the release. Trade the surprise for short-term opportunities, or use trends for longer-term positioning. Remember that strong data can be negative if it means more Fed tightening - context matters.

Want to learn more? Read about the Consumer Confidence Index or explore leading economic indicators.