(Bloomberg) - For some nine months now, the TACO trade has proven a reliably winning one on Wall Street.
Short for “Trump Always Chickens Out,” it emerged in the wake of the US president’s global tariff rollout — and rollback — last April. It quickly became the rallying cry for investors tuning out the more extreme White House threats as they kept buying risky assets.
There’s just one problem with the trade, though, as some on Wall Street are beginning to appreciate. If TACO means investors don’t need to panic when Trump signals aggressive policy action after another, then there are no market collapses violent enough to spook him into backing down like he did on tariffs last year.
Trump’s push to take over Greenland — complete with threats of tariffs against European allies — has brought a sense of urgency to the matter in markets.
They slumped on Tuesday, with the S&P 500 sinking 2.1%, the dollar sliding and volatility spiking, though the selloff quickly gave way to a tepid rebound Wednesday morning. For the TACO trade to live on, some say, there first needs to be a bigger, more chaotic rout that reminds Trump of the market pain he stirred up in April.
“Is this all just TACO again? Oh absolutely,” said Marko Papic, chief strategist at BCA Research. “But I think that we may have to have a Liberation Day-type of a downturn before we get to the bottom of it.”
In the telling of Papic, the escalating tension with Europe may serve multiple purposes — one of which is to shift attention from domestic policy issues, including a pending Supreme Court ruling on Trump’s authority to impose tariffs, a decision with potentially far-reaching consequences.
Another reason: It follows a string of disruptive maneuvers by the White House, including pressure on the Federal Reserve and renewed trade rhetoric, at a time when markets sit far higher than they did last spring. The S&P 500 has nearly doubled from its 2022 lows and remains near record highs, leaving less room for error. At the same time, hedging against an equity selloff had fallen to some of the lowest levels in years, according to the latest Bank of America Corp. survey — a backdrop that left many investors exposed just as volatility broke out this week.
Tuesday’s selloff offered the clearest sign yet that TACO’s immunity may be weakening. The S&P 500 wiped out its 2026 gains. A gauge of expected stock‑market swings, the VIX, jumped to its highest since November. Gold hit a record high and the dollar posted its worst two‑day run in about a month. Adding to the unease, a selloff in Japanese long yields — tied to shifting inflation expectations in Tokyo — stirred fresh concern about global borrowing costs.
One key reason markets haven’t fallen more, some say, is investors’ belief in TACO.
Ed Al‑Hussainy, a portfolio manager at Columbia Threadneedle, said investors have built the assumption of a Trump retreat into how they react to policy shocks. “If we didn’t have TACO,” he said, “we would see lower Treasury yields on a safe‑haven bid and a much larger spike higher in volatility.” He pointed to a pattern in which foreign investors hedge their currency exposure but continue to hold US credit — evidence, he said, that few are abandoning American assets even amid political uncertainty.
That confidence, Al‑Hussainy added, helps explain why risk premiums remain compressed despite mounting uncertainty.
While many still assume the president will pull back before markets suffer overt damage, some warn that belief may be premature. “If history is any guide, President Trump will back off from the most aggressive stance he is taking,” said Matt Maley, chief market strategist at Miller Tabak + Co. “However, I think it won’t happen until or unless the markets see some meaningfully negative moves. So far, these moves are only very minor.” Maley added that Trump’s ambitions around Greenland appear especially entrenched. “Those who think he’ll back off on Greenland to the degree that he has in the past are likely making a mistake,” he said.
Still, the market’s current altitude may leave it more at risk than during April’s tariff‑induced drop. The S&P 500 sits near record highs, and measures of expected volatility make clear how complacent markets had become. Skew, or the premium investors pay to insure against sharp declines, remains only modestly elevated despite Tuesday’s spike. The VVIX, a gauge of the volatility of volatility itself, sits well below the peaks seen in the April, October and November selloffs.
Some strategists remain unshaken. “The ask is always aggressive and then he ends up somewhere between the ask and the status quo,” said Michael Purves, chief executive of Tallbacken Capital Advisors. “It’s about ultimately whether the policies are going to be constructive for earnings, or the opposite of that.”
(updates markets in fifth paragraph.)
By Denitsa Tsekova and Isabelle Lee
With assistance from Geoffrey Morgan and Lu Wang
Photo by Manny Becerra on Unsplash
