Retail sales rose in September for the first time in 13 months, fueling hopes that the worst is behind retailers that head into the holiday season better prepared for a tough economic environment.

Several key second-quarter earnings reports could either validate or undercut assertions that the U.S. economy is poised for recovery.

Those elusive “green shoots” that economic optimists had been digging up lately were buried under disappointing data from the Commerce Department in Washington yesterday (Wednesday) when it was revealed that retail sales in the unexpectedly dropped in April.

Retail stores confirmed yesterday (Thursday) what most analysts had already suspected – the Grinch stole Christmas. The huge discount programs big retailers devised to bolster sales failed to attract enough consumers to save the holiday season.

President-elect Barack Obama’s transition team is reportedly putting the finishing touches on an economic recovery plan that could run from $675 billion to $1 trillion, though many experts believe the program will most like range between $700 billion and $800 billion.

If there’s a proverb that captures the outlook for the U.S. economy in the New Year, it’s the one that says: “It’s always darkest before the dawn.”

Early indicators suggest that there is still some life left in the American consumer. The hordes were back out for the Thanksgiving weekend, though mega discounts means retailers will still struggle to break even. Martin Denholm says investors should stick with bargain-oriented retailers like Wal-Mart (NYSE:WMT) and TJX Companies (NYSE:TJX).

Retail experts are predicting one of the most dismal holiday shopping seasons in decades this year – a crucial stretch that will set the stage for poor retail sales throughout 2009.

This holiday season will be a “bloodbath” for retailers, according to Marc Lichtenfeld. But there are still some companies that will dodge the downtrend. Marc says Kohl’s (NYSE:KSS), Wal-Mart (NYSE:WMT) and Dollar Tree (Nasdaq:DLTR) are well placed to weather the crisis. And they could even benefit from the demise of the competition.

By all reasonable measures, we are already in a recession, says Shah Gilani. Deflation has become today’s number one threat. But massive government rescues mean another bout of inflation looms on the horizon. Shah says investors should look to short vulnerable stocks in 2009. But in 12-18 months, they should be prepared for a “generational opportunity” to make a fortune.