US consumer spending is losing pace into early 2026. Real spending averaged 0.1% month on month in November and December, followed by another 0.1% rise in January, leaving a weak base for Q1. February data is expected to improve only slightly. A preliminary forecast points to 0.2% month-on-month growth in real control group retail sales, while the Chicago Fed estimates a 0.1% fall in real retail sales excluding autos.

Consumption Growth Outlook

Quarterly consumption growth is projected to slow to 1.8% q/q annualised in Q1 from 2.0% in the prior quarter. Year on year, spending is forecast to rise 2.4% in Q1, with tax refunds expected to provide more support in Q2 than earlier in the year. Risks are rising from the labour market and prices. After strong January figures, February labour conditions appeared softer, and leading indicators point to March payroll gains in the 0k–50k range. Higher oil and petrol prices, Middle East conflict effects on sentiment, and inflation in March and April are expected to reduce real incomes. Refund patterns and equity-market declines may also widen differences in spending across households. The momentum we saw in consumer spending has been cooling off since late last year. Real spending created a weak base for the first quarter, and with the latest University of Michigan Consumer Sentiment Index falling to 65.2, its lowest level in six months, we see this softness continuing. This environment suggests considering bearish positions on consumer discretionary ETFs like XLY, perhaps through buying puts or selling call spreads.

Market Hedging Considerations

Downside risks for the broader market are growing as the labor market shows signs of slowing. Recent weekly jobless claims have ticked up to 225,000, continuing an upward trend and pointing to the weak March payrolls we anticipate. Protective puts on broad market indices like the S&P 500 could be a prudent way to hedge against this potential economic weakness in the coming weeks. At the same time, rising energy costs are hitting consumers directly. With WTI crude oil now holding above $85 a barrel, we expect this to pressure household budgets and fuel inflation, much like the energy spike did back in 2022. This could make call options on energy sector funds a compelling trade while also reinforcing a cautious stance on consumer-focused industries. This combination of slowing growth and sticky inflation, which remains stubbornly above 3.5% in the latest CPI report, is increasing uncertainty. We are seeing the VIX, the market’s fear gauge, climb back above 18, indicating traders are bracing for larger price swings ahead. Buying VIX calls could be an effective way to profit from the rising volatility we expect. The consumer’s resilience is being tested, especially for lower-income households squeezed by gas prices. While we still expect tax refunds to provide some support, this seems more likely to be a factor for the second quarter rather than the immediate future. This timing suggests that any optimistic plays on a consumer rebound might be better structured for May or June expiration dates. Create your live VT Markets account and start trading now.

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