Monday, January 5th, 2026
How To Limit Early 2026 Market “RISK”
The stock market’s erratic behavior over the last two months of 2025 as measured by the SPDR S&P 500 ETF Trust (SPY). After closing above 680 on October 31, the SPY dropped under 669 just one week later. The following week it rose above 681 only to fall below 651 on November 20.
Just as quickly, the index shot back up 681 one week later and then climbed above 689 two weeks after that. The following week it fell below 675 only to rally above 690 by the end of last week. After all that zigzagging, the index had gained a little over one percent during that two-month stretch
So, what was the point of all that seemingly pointless activity???
Conflicting Economic Data
Most of that trading activity was to wash out the dirt and grime created by a sequence of conflicting and confusing economic data due to the federal government “SHUTDOWN”. During the “SHUTDOWN” we wondered if INFLATION was RISING or FALLING, as we did for the UNEMPLOYMENT RATE.
After the “SHUTDOWN” we learned both INFLATION and the UNEMPLOYMENT RATE kept RISIN from August through October (2025) but at slow enough paces not to set off “ALARM BELLS” on Wall Street.
That being the case, the FED reduced its policy rate by one-quarter of a percentage point in mid-December (2025), precisely as expected.
Recently, the U.S. Bureau of Economic Analysis (BEA) announced that GROSS DOMESTIC PRODUCT (GDP) INCREASED at an annual rate of 4.3 percent during the third quarter, far above the 3.3 percent figure widely anticipated on Wall Street. Most of that GAIN was due to INCREASED consumer spending and DECREASED imports, neither of which is necessarily “HEALTHY” for the economy in the long run.
That is because both of those conditions are likely to INCREASE INFLATION down the road. Consumers are not buying more items, but they are paying more for them due to in part to recently enacted import tariffs. The fact that imports are decreasing is proof of that, even though that has the perverse effect of increasing GDP in the near term.
Interconnected Markets
All of that raises a tantalizing question heading into the new year (2026): If none of those critical data points were known two (2) months ago, why has the stock market barely budged from where it was before all that information become public???
I believe the answer to that question goes far beyond a simple explanation of how “GREED” and “FEAR” manifest itself in the form of individual investor “PSYCHOLOGY”, as many market “PUNDITS” would have you believe.
I don’t believe you or I have suddenly become more “IRRATIONAL” than we usually are, nor do I think we have suddenly become less “GREEDY”…
HOWEVER, we have become more exposed to the volatility that accompanies the invisible but rapidly growing web of interconnected investment products controlled by CURRENCY TRADERS, HEDGE FUNDS, and INSTITUTIONAL INVESTORS that dictate the SHORT-TERM direction of the financial markets.
To be clear, this is not a “CONSPIRACY THEORY” of any sort; each of those investors is engaging in behavior they believe will yield the greatest “RISK-ADJUSTED” return for their clients. In theory that is good for the financial markets by enhancing LIQUIDITY, which in turn should result in more accurate pricing. Which it does, EXCEPT when the amount of money being exchanged becomes so LARGE that it affects prices in other markets.
So, what can you do about it???
As an individual investor, there is nothing you can do to prevent it from happening, but you can devise a strategy to get “P.A.I.D.” from it.
A lot of good companies are going to see their stock prices whipsawed in the weeks and months to come, resulting in temporary “BUYING” opportunities if YOU, ME, WE the ATWWI FAMILY are prepared to act quickly.
I also suggest you learn to shut out the “NOISE” that accompanies extreme VOLATILITY, which only stokes “FEAR” and invites “IRRATIONAL” decision-making. While it is much harder to do in practice than commit to in thought, this is a strategy that all successful long-term investors have learned.
Limit Downside “RISK”
If you find that impossible to do, then consider acquiring an “INSURANCE POLICY” for your portfolio by buying OUT-OF-THE-MONEY “PUT” OPTIONS on the S&P 500 Index. That way, you can CAP your potential losses to an acceptable level in the unlikely event of a stock market “MELTDOWN”.
That should help you sleep better at night and give you the resolve to ignore the daily ups and downs of the stock market. Yes, the cost of that “INSURANCE POLICY” will cut into your future returns, but the net result should still be far greater than bailing out of the market whenever Wall Street hits the “PANIC” button.
Most importantly, it will help you avoid the TRANSACTION COSTS and “PANICKED” trading losses that can leave your portfolio in shambles.
PEACE & BLESSINGS
Kenneth Reaves, Ph.D.