2025: Political Polarization, Market Volatility, and the Risk of a 2026 Flash Crash
The year 2025 has proven to be one of the most controversial periods for many sectors, particularly at the intersection of politics and the stock market. When examining price action during the previous Trump presidency, it becomes clear that market volatility is often the visual representation of polarized human emotion among market participants.
Although I would not classify myself as an investor some might label a “doomer” or a “panic seller/ panican” I do see striking similarities in price behaviour between the 2018–2020 Trump presidency and the present market environment.
For these reasons, I wanted to write this article exploring the potential risk of a rapid flash crash in 2026—similar to the COVID-driven crash of 2020. Should such an event occur, it could ultimately present a generational buying opportunity for long-term investors.
My analysis will be framed from three major perspectives: fundamental analysis, technical analysis, and market psychology, with particular attention to how current events mirror historical periods and how emotion has influenced market valuations.
So, let’s begin.
Fundamental Analysis: Tariffs, Inflation, and Policy Uncertainty
Fundamentally, the logical starting point is the Trump-era tariffs introduced in 2018. The U.S. implemented significant tariffs primarily on Chinese imports launching a high-profile trade war. These tariffs covered hundreds of billions of dollars’ worth of goods and prompted retaliatory measures, disrupting supply chains, increasing costs, and weighing heavily on investor sentiment.
In 2025, tariffs have escalated even further, extending beyond China to major trading partners such as Canada and Mexico. The average U.S. tariff rate has now risen to its highest level in decades. These policies continue to raise consumer costs, influence inflation metrics, and create uncertainty for businesses. Critics argue that tariffs function as a broad tax on consumers.
However, it should be noted that even Federal Reserve Chair Jerome Powell has recently stated that the full cost of tariffs has yet to be realized. This uncertainty was reinforced during the Fed’s most recent meeting, which resulted in a 25-basis-point rate cut. The lack of clarity surrounding the economic impact of tariffs is unsettling many investors, leading to concerns that inflation could re-emerge in 2026.
That said, the argument that tariffs inevitably lead to broad-based inflation is more complex than it appears. Several studies most notably from Federal Reserve branches in St. Louis, San Francisco, Boston, and Richmond suggest that tariffs have a dual effect. While they are immediately inflationary by raising import prices (a cost-push effect), they can become deflationary over the longer term by slowing economic growth and dampening consumer demand.
As spending declines and supply chains adjust, overall price pressures may weaken or even turn deflationary, creating a tug-of-war in economic data. This dynamic was further highlighted in Morgan Stanley’s August 2019 report titled “Tug of War,” written by Andrew Harmstone. Despite tariffs theoretically raising prices, U.S. inflation actually declined during the U.S.–China trade war, with headline inflation falling to approximately 1.6% in 2019.
This raises an important question: given recent CPI, Core CPI, and PCE data, why has inflation been declining rather than accelerating?
While the Federal Reserve remains highly focused on preventing a resurgence of inflation and risks slowing the economy by keeping rates elevated, there is a possibility that policymakers are underestimating the risk of deflation. The reality is that the Fed’s toolkit makes it easier to respond to a falling market by cutting rates aggressively, potentially confirming that inflation is no longer the primary threat. This policy pivot, however, can introduce significant uncertainty and fuel extreme market volatility.
Monetary Policy: Then vs. Now
During 2018 and early 2019, the Federal Reserve was in a tightening cycle, gradually raising interest rates. By contrast, in late 2025, the Fed has entered a loosening phase. It is important to remember that the Fed also began cutting rates in August 2019 as the economic effects of tariffs became more visible and inflation softened.
There appears to be a parallel today. After several consecutive months of declining inflation data, the Fed has once again begun cutting rates. One notable difference, however, is the labor market. Unemployment ranged between approximately 3.7% and 3.9% in 2019, compared to roughly 4.4% in 2025. This higher unemployment rate plays a larger role in shaping the current easing cycle.
Political Polarization and Market Psychology
In my view, one of the most controversial and impactful factors affecting the global economy and financial markets is Donald Trump himself. His presidency has consistently generated extreme polarization, influencing media narratives, financial markets, global relations, and human psychology.
Politics remains deeply intertwined with economic policy in both periods, shaping market confidence and investor risk perception. While the specific drivers differ, tax cuts and early trade disputes in 2018 versus aggressive trade policy and Fed tensions in 2025, the effect on markets is clearly visible in price charts.
We also see this reflected in headlines about hedge fund managers underperforming the S&P 500 due to personal or political biases against Trump. Emotional positioning, rather than objective analysis, has historically proven costly.
Adding to the intrigue are recent discussions about issuing $2,000 stimulus checks funded by tariff revenue. This bears a striking resemblance to the $2,000 checks distributed during the COVID era. While such stimulus could temporarily boost markets and economic activity, these measures typically emerge during periods of stress, and crisis, raising the question of what risks policymakers are anticipating.
Technical Analysis: History Rhymes
While there is far more fundamental data that could be explored, I want to shift focus to the technical side of the market.
As a predominantly technical analyst, I view price action as a direct reflection of collective human psychology. What stands out most are the undeniable similarities between the 2018–2020 Trump term and the current market environment.
During the tariff-driven sell-off of 2018, markets declined approximately 21%, followed by a sharp V-shaped recovery, often referred to as one of the most hated rallies in history. Over the following year, prices rallied nearly 45%, ultimately reaching the 1.618 Fibonacci extension, a common expansion target in trending markets.
In 2025, we saw a nearly identical sequence: a 21% decline triggered by tariffs, followed by another V-shaped recovery what many now call the “most hated rally, part two.” What is particularly striking is the speed of this move both to the upside and downside, suggesting that market polarity and emotional extremes have intensified since 2018.
Even more compelling is the bar-pattern overlay from the 2018 tariff period projected onto today’s price action. The alignment of trends, consolidations, corrections, and timing is remarkably precise. The choppy range beginning in September mirrors the historical pattern almost exactly.
Currently, price is approaching the 1.618 Fibonacci extension near the 700 level on SPY—a target referenced by many analysts and media personalities, including Tom Lee. When such levels are reached, history suggests it may be prudent for investors to begin considering profit-taking.
Looking Ahead to 2026
It is reasonable to expect 2026 to be a volatile year. Potential headwinds include the market’s reaction to a new Federal Reserve chair, Supreme Court rulings related to Trump-era tariffs, and ongoing global trade tensions, among others.
While historical statistics suggest that a fourth year following three consecutive years of 20%+ gains often remains positive, it is difficult to envision a smooth melt-up given the current geopolitical and economic backdrop.
Although I remain optimistic about the stock market over the long term, I believe it is essential to acknowledge the risks. Should a sharp correction or flash crash materialize, it may represent one of the most compelling financial opportunities of the coming decade.
I will also add some further analysis as confluence from additional technical strategies such as Elliot Wave theory detailing the likely hood that we may be at the end of a major impulsive move.
Whether you agree or disagree, I welcome your thoughts and perspectives.
And as always—only time will tell.
The year 2025 has proven to be one of the most controversial periods for many sectors, particularly at the intersection of politics and the stock market. When examining price action during the previous Trump presidency, it becomes clear that market volatility is often the visual representation of polarized human emotion among market participants.
Although I would not classify myself as an investor some might label a “doomer” or a “panic seller/ panican” I do see striking similarities in price behaviour between the 2018–2020 Trump presidency and the present market environment.
For these reasons, I wanted to write this article exploring the potential risk of a rapid flash crash in 2026—similar to the COVID-driven crash of 2020. Should such an event occur, it could ultimately present a generational buying opportunity for long-term investors.
My analysis will be framed from three major perspectives: fundamental analysis, technical analysis, and market psychology, with particular attention to how current events mirror historical periods and how emotion has influenced market valuations.
So, let’s begin.
Fundamental Analysis: Tariffs, Inflation, and Policy Uncertainty
Fundamentally, the logical starting point is the Trump-era tariffs introduced in 2018. The U.S. implemented significant tariffs primarily on Chinese imports launching a high-profile trade war. These tariffs covered hundreds of billions of dollars’ worth of goods and prompted retaliatory measures, disrupting supply chains, increasing costs, and weighing heavily on investor sentiment.
In 2025, tariffs have escalated even further, extending beyond China to major trading partners such as Canada and Mexico. The average U.S. tariff rate has now risen to its highest level in decades. These policies continue to raise consumer costs, influence inflation metrics, and create uncertainty for businesses. Critics argue that tariffs function as a broad tax on consumers.
However, it should be noted that even Federal Reserve Chair Jerome Powell has recently stated that the full cost of tariffs has yet to be realized. This uncertainty was reinforced during the Fed’s most recent meeting, which resulted in a 25-basis-point rate cut. The lack of clarity surrounding the economic impact of tariffs is unsettling many investors, leading to concerns that inflation could re-emerge in 2026.
That said, the argument that tariffs inevitably lead to broad-based inflation is more complex than it appears. Several studies most notably from Federal Reserve branches in St. Louis, San Francisco, Boston, and Richmond suggest that tariffs have a dual effect. While they are immediately inflationary by raising import prices (a cost-push effect), they can become deflationary over the longer term by slowing economic growth and dampening consumer demand.
As spending declines and supply chains adjust, overall price pressures may weaken or even turn deflationary, creating a tug-of-war in economic data. This dynamic was further highlighted in Morgan Stanley’s August 2019 report titled “Tug of War,” written by Andrew Harmstone. Despite tariffs theoretically raising prices, U.S. inflation actually declined during the U.S.–China trade war, with headline inflation falling to approximately 1.6% in 2019.
This raises an important question: given recent CPI, Core CPI, and PCE data, why has inflation been declining rather than accelerating?
While the Federal Reserve remains highly focused on preventing a resurgence of inflation and risks slowing the economy by keeping rates elevated, there is a possibility that policymakers are underestimating the risk of deflation. The reality is that the Fed’s toolkit makes it easier to respond to a falling market by cutting rates aggressively, potentially confirming that inflation is no longer the primary threat. This policy pivot, however, can introduce significant uncertainty and fuel extreme market volatility.
Monetary Policy: Then vs. Now
During 2018 and early 2019, the Federal Reserve was in a tightening cycle, gradually raising interest rates. By contrast, in late 2025, the Fed has entered a loosening phase. It is important to remember that the Fed also began cutting rates in August 2019 as the economic effects of tariffs became more visible and inflation softened.
There appears to be a parallel today. After several consecutive months of declining inflation data, the Fed has once again begun cutting rates. One notable difference, however, is the labor market. Unemployment ranged between approximately 3.7% and 3.9% in 2019, compared to roughly 4.4% in 2025. This higher unemployment rate plays a larger role in shaping the current easing cycle.
Political Polarization and Market Psychology
In my view, one of the most controversial and impactful factors affecting the global economy and financial markets is Donald Trump himself. His presidency has consistently generated extreme polarization, influencing media narratives, financial markets, global relations, and human psychology.
Politics remains deeply intertwined with economic policy in both periods, shaping market confidence and investor risk perception. While the specific drivers differ, tax cuts and early trade disputes in 2018 versus aggressive trade policy and Fed tensions in 2025, the effect on markets is clearly visible in price charts.
We also see this reflected in headlines about hedge fund managers underperforming the S&P 500 due to personal or political biases against Trump. Emotional positioning, rather than objective analysis, has historically proven costly.
Adding to the intrigue are recent discussions about issuing $2,000 stimulus checks funded by tariff revenue. This bears a striking resemblance to the $2,000 checks distributed during the COVID era. While such stimulus could temporarily boost markets and economic activity, these measures typically emerge during periods of stress, and crisis, raising the question of what risks policymakers are anticipating.
Technical Analysis: History Rhymes
While there is far more fundamental data that could be explored, I want to shift focus to the technical side of the market.
As a predominantly technical analyst, I view price action as a direct reflection of collective human psychology. What stands out most are the undeniable similarities between the 2018–2020 Trump term and the current market environment.
During the tariff-driven sell-off of 2018, markets declined approximately 21%, followed by a sharp V-shaped recovery, often referred to as one of the most hated rallies in history. Over the following year, prices rallied nearly 45%, ultimately reaching the 1.618 Fibonacci extension, a common expansion target in trending markets.
In 2025, we saw a nearly identical sequence: a 21% decline triggered by tariffs, followed by another V-shaped recovery what many now call the “most hated rally, part two.” What is particularly striking is the speed of this move both to the upside and downside, suggesting that market polarity and emotional extremes have intensified since 2018.
Even more compelling is the bar-pattern overlay from the 2018 tariff period projected onto today’s price action. The alignment of trends, consolidations, corrections, and timing is remarkably precise. The choppy range beginning in September mirrors the historical pattern almost exactly.
Currently, price is approaching the 1.618 Fibonacci extension near the 700 level on SPY—a target referenced by many analysts and media personalities, including Tom Lee. When such levels are reached, history suggests it may be prudent for investors to begin considering profit-taking.
Looking Ahead to 2026
It is reasonable to expect 2026 to be a volatile year. Potential headwinds include the market’s reaction to a new Federal Reserve chair, Supreme Court rulings related to Trump-era tariffs, and ongoing global trade tensions, among others.
While historical statistics suggest that a fourth year following three consecutive years of 20%+ gains often remains positive, it is difficult to envision a smooth melt-up given the current geopolitical and economic backdrop.
Although I remain optimistic about the stock market over the long term, I believe it is essential to acknowledge the risks. Should a sharp correction or flash crash materialize, it may represent one of the most compelling financial opportunities of the coming decade.
I will also add some further analysis as confluence from additional technical strategies such as Elliot Wave theory detailing the likely hood that we may be at the end of a major impulsive move.
Whether you agree or disagree, I welcome your thoughts and perspectives.
And as always—only time will tell.
Note
Here is my current Elliot Wave count, where the recent Wave 3 (Most Aggressive Wave) extends into the 2.618 extension before forming an ABC correction into the 1-1 extension. The move since has been directly upwards in a strong trending direction, hinting an impulsive wave. In the perfect world, the end of this move would conclude as a rising wedge / diagonal for a 5th and final Wave before breaking down. Note
The key for this pattern is 5 pivots consisting of 3 wave ABC measured moves. Once we have the first few pivots, we can watch for the pattern to break, and a reversal to begin. 
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.