Wall Street’s ‘TACO’ trade — betting President Trump’s trade threats will be reversed — has returned. Investors now buy when policy risks rise, assuming threats will be withdrawn, fueling rapid rebounds after selloffs. This pattern masks underlying fragility: rallies hinge on retreats, not structural improvement, and raising stakes for everyday investors.
“Background: What the TACO Trade Means”
The TACO trade stands for “Trump Always Chickens Out.” It emerged as a market tactic: when the administration threatens disruptive trade measures, investors assume the threat will be rolled back and position accordingly.
Its origins trace to dramatic selloffs followed by pauses and reversals that rewarded those who bought the dip. Over time, this behavior hardened into a strategy rather than an occasional bet.
“The Latest Episode: Greenland, NATO and a Volatile Week”
Recent events provided a clear example. After a surprise threat of tariffs tied to a proposed Greenland move, the president reversed course and hinted at a NATO framework instead.
The immediate market response was sharp: large gains in the Dow and S&P and a pullback in the VIX. Traders celebrated the absence of a policy that had never been fully formed.
“Why the Rally Is Fragile”
Crucially, gains were driven not by better fundamentals but by the withdrawal of threats. That difference matters: markets are being rewarded for the reversal of bad policy, not for positive economic changes.
Relying on this pattern is risky. The TACO trade assumes consistent behavior from an unpredictable leader. When assumptions fail, market reactions could be severe, and the costs of repeated cycles of threat and retreat accumulate.
“Outlook and What Investors Should Expect”
With midterm elections approaching, volatility is likely to increase. Historically, election years bring weaker market performance and more policy experimentation that tests market sentiment.
Because more households hold equities now, swings translate faster into changes in confidence and spending. That feedback loop both encourages reversals and magnifies the damage when controversial policies are carried through.
For investors, the prudent course is to prepare for a bumpier ride. The TACO trade can be profitable but rests on a political habit, not a guarantee. Expect turbulence and price in the possibility that the strategy could fail.
