From 4 weeks to a few days: Wall Street understands “TACO”, Trump policy trial period significantly shortened
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Wall Street investors are becoming adept at navigating the rhythm of Trump’s policy threats. The latest Greenland tariff episode—going from threat to retreat in just a few days—was much shorter than the previous typical cycle of 4 to 6 weeks. “TACO” (Trump Always Chickens Out) thinking is now deeply embedded in market pricing mechanisms.
On Wednesday the 21st, Eastern Time, Trump announced that he had reached a framework agreement on the Greenland issue with NATO Secretary-General Rutte, thereby postponing the planned tariff increases on European countries that were set to take effect February 1. According to Xinhua News, after meeting with Rutte in Davos, Switzerland, Trump said he would not proceed with tariffs on eight European countries opposing the U.S. acquisition of Greenland, as originally planned. The day before, the U.S. stock market lost over $1 trillion in a single day, marking one of the worst sell-offs since April. Although Trump called this drop “peanuts,” the timing of his policy shift highlights the influence of market volatility on his decision-making.
“The government is clearly sensitive to stock market moves,” said Kristina Hooper, Chief Market Strategist at Man Group, which manages $214 billion in assets. “That was very evident in the decision to retreat.” Corpay Chief Market Strategist Karl Schamotta said, “Trump’s comments on Wall Street’s reaction sent a signal—it hit a nerve for him.”
This dynamic is changing market behavior patterns. On one hand, investors are increasingly convinced that Trump will compromise under market pressure; on the other, they are being forced to adapt to more extreme policy threats. Jason Bobora-Sheen, portfolio manager at Ninety One, warned: “The risk facing markets is that this dynamic may let the ‘wolf’ get closer than expected one day.”
Market forces drive rapid U-turns
The market shock caused by Trump’s Greenland tariff threat prompted a swift policy reversal. After U.S. stocks suffered losses of over $1 trillion on Tuesday, by Wednesday afternoon Trump had already abandoned the tariff plan against European allies.
White House spokesperson Kush Desai defended: “Anyone who doubts President Trump’s willingness to follow through when others refuse to make a deal should ask Maduro or Iran what they think.”
Investors first experienced “TACO” during the market turmoil after April 1. At that time, the scale and scope of Trump’s trade war shocked investors, causing U.S. stocks to plummet and also impacting the bond market. But the subsequent rebound was just as fierce, causing heavy losses for those who sold off their stocks.
Policy test cycle significantly compressed
Global investors are now accustomed to the pattern of Trump policy announcements—usually making them on weekends when stock, bond, and currency markets are closed.
Charles-Henry Monchau, Chief Investment Officer at Switzerland’s Syz Bank, previously described a “Trump tariff cycle timeline” of 4 to 6 weeks: starting with the “shock phase,” where stocks fall and volatility rises, followed by U.S. officials reassuring the markets, and finally ending with a promise to resolve the issue.
“This time (the Greenland incident) was much shorter,” Monchau said, “maybe because the risk was too high for everyone.”
Other cases include the U.S. dollar’s one-day drop last July, after reports that Trump was asking lawmakers about the possibility of firing Federal Reserve Chair Powell. After Trump stated he “had no plan to take any action,” the dollar quickly rebounded.
Pictet Asset Management Chief Strategist Luca Paolini pointed out:
“The difference now is that Trump has much less political capital. With midterm elections approaching, the pain threshold is much lower.”
Some investors worry that the TACO expectation is now so prevalent, it may weaken the market’s ability to respond to economic or political shocks. At the height of the Greenland crisis, a government bond market investor said they tried to “actively avoid all Greenland noise”—the bond market response was indeed milder than stocks.
Before Trump’s retreat this week, Michael Krautzberger, Chief Investment Officer of Open Markets at Allianz Global Investors, said:
“If I were an advisor to some European governments, I’d say: you almost need to create some market volatility, because Trump cares deeply about it—even more than other politicians.”
On Thursday, as Trump returned to the U.S., the S&P 500 closed up 0.6%. Futures indicated a further 0.2% rise on Friday.
Investors adjust response strategies
Facing the new normal, some cross-market investors are choosing to tactically reduce positions ahead of high-risk speeches and events, while holding gold and other commodities that could benefit from heightened uncertainty for the long term.
Gold continued its record-breaking rally this week, climbing even after Trump’s policy U-turn on Greenland, with prices approaching $5,000 per ounce.
Trevor Greetham, Head of Multi-Assets at Royal London Asset Management, said he has been buying gold to hedge against risks that Trump might pursue certain extreme policies, such as limiting the Fed’s independence under Powell’s successor.
“It feels like the market is a little like a frog in warming water, and the temperature keeps rising,” he said, “(The risk is) you become immune to triggers that would have caused a significant sell-off ten or twenty years ago.”
Risk reminder and disclaimerMarkets involve risks, and investments require caution. This article does not constitute personal investment advice, and does not take into account the individual investor's specific objectives, financial situation, or needs. Investors should consider whether any opinions, views, or conclusions in this article are appropriate for their personal circumstances. Investment is at your own risk.
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