For much of Thursday morning before the market's open, it seemed as if we were going to get a nice Valentine's Day rally thanks to optimism surrounding the China trade talks and the avoidance of another government shutdown.

However, the major indices abruptly reversed course after the December retail sales report was released. The Dow Jones Industrial Average went from about 100 points higher in the pre-market to a drop of nearly 200 points shortly after the opening bell. As of 10:45 a.m. EST, the Dow was down by about 130, with other major indices posting similar declines.

Why was the report so bad in the view of stock traders, and what could it mean for the U.S. economy?

Shopper walking towards mall exit with shopping bags in hand.

Image source: Getty Images.

December was a tough month for retailers

In a nutshell, retail sales in December fell 1.2%, their worst showing since September 2009. And, anyone who remembers what was going on in the economy in 2009 knows that it's not exactly a time whose economic data you'd want to revisit.

Looking through some of the specifics, here's a rundown of what investors need to know about today's report:

  • Economists had expected an increase of 0.2%.
  • The news wasn't all bad. On a year-over-year basis, retail sales rose by 2.3% in December.
  • Core retail sales (excludes autos, gasoline, building materials, and food services) fell 1.7%.
  • Online and mail-order sales plunged by 3.9% after a strong 2.8% increase in November. This was the biggest drop in that category since November 2008.
  • The report also revised the November sales data slightly downward. Instead of showing a 0.2% gain, it gained just 0.1%.

What does it mean for the U.S. economy?

To be perfectly clear, no individual economic report gives a full picture of how the economy is doing. However, the big disappointment in December retail sales suggests that consumers may have been starting to lose confidence toward the end of the year.

A factor in the surprise decline could be the stock market's volatile and generally poor performance throughout December. We'll have to wait and see whether retail sales rebounded in January along with the major stock indices. Thanks to the government shutdown, the January retail sales report (which was scheduled to be released tomorrow) is delayed with no release date currently scheduled.

The bottom line is that we don't know at this point if the December retail sales report was an isolated drop fueled by Wall Street volatility, or if it represents a longer-term downtrend in consumer spending. If it turns out to be a one-time dip, it's not so bad. If the latter is true and January's retail sales report doesn't show a rebound, it could be bad news for the U.S. economy and the stock market.