Karyn Cavanaugh, market strategist with ING Investment Management in New York, wrote a note to clients Wednesday about the less-than-merry retail sales.
"I hope that they're reading this from the mall," she said later, "because retail sales could use a boost."
The MasterCard Advisors SpendingPulse report found that sales of electronics, clothing, jewelry and home goods increased just 0.7 percent in the two months before Christmas compared with the same period last year.
That's well below the growth of 3 to 4 percent that analysts had expected and the worst performance since 2008, when spending shrank during the Great Recession. It's also well below last year, when sales climbed 4 to 5 percent during November and December, according to ShopperTrak.
Major U.S. retailers including Abercrombie & Fitch, Sears Holdings, Urban Outfitters, Limited Brands, Nike and Gap were all down. Handbag maker Coach, a bellwether of the luxury market, plummeted $3.13 to $54.40. It lost more than 5 percent of its value, more than any other company in the S&P 500.
Amazon.com, which helps analysts get a read on the entire retail market, was down 4 percent, losing $10.24 to $248.38.
Plodding retail sales are a concern because roughly 70 percent of the U.S. economy depends on consumer spending. When it slows, that can take a chunk out of company earnings, which in turn pushes down the stock market.
The retail numbers are also a sign that, despite scattered reports indicating an improving economy, including a Wednesday report about rising home prices, many consumers remain uneasy.
"Consumers just aren't confident," said Jeff Sica, president and chief investment officer of SICA Wealth Management in Morristown, N.J. "They don't feel a sense of security that they're going to be able to maintain their job or their income or their savings."
Sica said that normally the market rises at this time of year, for five days before and five days after Christmas the so-called Santa Claus rally.
Since 1969, stocks have risen an average of 1.6 percent over the last five days of the year and the first two of January, according to The Stock Trader's Almanac.
This year, it seems, the retail sales and "fiscal cliff" have been too much of an overhang.
If Republicans and Democrats can't agree to a new budget by Dec. 31, then the country will go over the "fiscal cliff," which means lower government spending and higher taxes will kick in. On Wednesday, President Barack Obama cut short his Christmas vacation in Hawaii to resume budget talks with Congressional Republicans.
The market has risen more or less steadily since mid-November, despite the lack of a deal. That means many traders assumed that lawmakers would work out something before the deadline.
While that's still possible, some analysts said that what the market feared most wasn't the cliff, but the possibility that lawmakers would come up with only a stop-gap solution. That would probably mean they'd have to meet again in the new year to hammer out a permanent deal, dragging out the feeling of uncertainty.
"It's like ripping the Band-Aid off now versus later," Cavanaugh said. "The Band-Aid's got to come off. We've got to cut spending, we've got to pay down the debt."
The bright spot was a report from the Standard & Poor's/Case-Shiller national home price index, which said that home prices rose in most major U.S. cities rose in October compared with the same month a year ago. However, prices fell in many cities compared to the month before.
It was the first trading day after the Christmas holiday. Trading volume was low, and European markets were still closed.
The yield on the benchmark 10-year Treasury note edged down to 1.76 percent from 1.77 percent Monday, a sign that investors were taking money out of stocks and putting it into bonds. Oil prices rose. Benchmark crude gained $2.06 to $90.67 a barrel.