For much of this year, volatility tied to tariff announcements has rewarded investors who viewed sell-offs as temporary buying opportunities. The so-called “TACO” trade — shorthand for “Trump Always Chickens Out” — has become a tactical thesis for market participants betting that economic damage or market stress will ultimately force policy reversals.
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Advisors should reexamine the assumption that market pullbacks will always temper extreme policy shifts.
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The “Trump Always Chickens Out” trade may have emboldened risk, not neutralized it.
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GMO’s Ben Inker warns that tepid market reactions may reduce the guardrails on future escalation.
Coined by Financial Times columnist Robert Armstrong, the TACO trade refers to the belief that former President Trump will retreat from aggressive trade or monetary policy proposals once financial markets react negatively. Many market participants, including wealth managers and advisors, have come to see this behavior as a predictable pattern.
Yet that belief could now be inviting risk rather than managing it.
Ben Inker, co-head of asset allocation at GMO, warns that a weakening market response to Trump’s more extreme policy moves may be counterproductive. “Markets served as a restraint earlier in the year,” Inker said, pointing to the president’s April decision to pause tariffs following sharp equity and bond market declines. “But if markets stop reacting — or react less — that leash disappears.”
This week, the White House reignited its trade rhetoric with a flurry of proposals: 25% tariffs on Japan and South Korea, 50% on Brazil, and 35% on Canada. While equity markets dipped modestly on Friday, the reaction was muted compared to the broader sell-off that occurred earlier in the year. That lack of pushback may, ironically, encourage more confrontation.
“What we’re seeing now is a more aggressive posture from the president,” Inker said. “The 50% tariff on Brazil reflects a presumption that there’s no real consequence — a notable shift from when the administration backed down after bond markets responded violently to the so-called ‘Liberation Day’ tariffs.”
From an advisory perspective, the central concern is whether portfolio positioning that hinges on political volatility repeating a familiar cycle is still prudent. The S&P 500 and Nasdaq notched record highs on Thursday, with valuations pushing toward historical extremes. Inker noted that the S&P 500 appears close to 40% overvalued — signaling froth, not safety.
“The U.S. stock market is quite expensive,” Inker said. “Not as extreme as the peak in 2000, but certainly high relative to almost any other period.” And versus global equities, U.S. stocks now sit at what Inker calls “an all-time high in valuation divergence.”
For wealth advisors, the implication is clear: rebalancing into non-U.S. equities and deep value names may offer better long-term positioning if sentiment shifts or volatility returns with force. “There are still opportunities,” Inker emphasized, “but they’re not where the index performance is leading.”
While TACO has so far been a profitable strategy, advisors need to remain vigilant about the underlying assumption that market tantrums will continue to police extreme policy. If that discipline weakens — and current behavior suggests it might — a more durable correction could lie ahead.
