The self-dilemma of TACO trading: When the market is no longer panicking, Trump has no need to back down!
Over the past nine months, Wall Street's popular "TACO trade" strategy is facing a paradoxical dilemma. The strategy is based on the assumption that "Trump always chickens out," but investors' calm responses may themselves be stopping Trump from making policy concessions.
Earlier, Trump’s push to take over Greenland and threat to impose tariffs on European allies heightened market urgency. U.S. stocks fell sharply on Tuesday, with the S&P 500 index dropping 2.1%, the dollar weakening, and volatility rising. Although Wednesday’s U.S. stock futures showed a moderate rebound, it remains unclear whether the selloff will continue.
The market has reacted calmly to Trump’s latest threats, but some strategists warn the TACO trade may be premature—Trump’s ambition on the Greenland issue seems particularly firm. For the TACO trade to keep working, the market may first need to go through a larger, more chaotic crash, recreating the kind of pain that forced Trump to reverse course in April last year. Current market valuations are much higher than last spring; the S&P 500 has almost doubled from its 2022 lows and remains near historical highs, greatly narrowing the margin for error.
Strategy Logic Falls into Self-Contradiction
"TACO trade" stands for "Trump Always Chickens Out," and was born last April when the U.S. president quickly reversed the global tariffs he had announced. The strategy quickly became an investor guidebook, encouraging them to disregard extreme threats from the White House and keep buying risk assets.
But the strategy is now facing intrinsic contradictions. BCA Research’s Chief Strategist Marko Papic says, “Is this TACO again? Absolutely. But I think we may need to go through a drop similar to last April to find the bottom.” If TACO means investors don’t panic when Trump signals aggressive policies, then the market won’t see the kind of sharp selloff that would force him to back down like last year.
Nevertheless, Tuesday’s cross-asset selloff was the worst since last April, with stocks, bonds, and Bitcoin all down in sync. The S&P 500 wiped out all its 2026 gains, the VIX volatility index rose to its highest level since November, gold hit a record high, and the dollar posted its worst two-day performance in about a month.
The market’s current high level might make it even more vulnerable than during last April’s tariff-driven drop. The S&P 500 is near all-time highs, and volatility indicators show the market had become extremely complacent. According to Bank of America’s latest Global Fund Manager Survey, positions hedging against a stock market crash have dropped to the lowest in years, leaving many investors completely unprepared for this week’s spike in volatility.
Columbia Threadneedle portfolio manager Ed Al-Hussainy says investors have internalized the assumption that Trump will back down in their reaction to policy shocks. “If not for TACO,” he says, “we’d see U.S. Treasury yields drop due to flight to safety, and volatility spike sharply.” He points out that foreign investors continue to hold U.S. debt assets while hedging currency risk, showing that even amid political uncertainty, few are abandoning U.S. assets.
This confidence also explains why risk premiums remain compressed even as uncertainty increases.
Threshold for Policy Shift May Have Risen
Some strategists warn that assuming Trump will back down before the market suffers significant damage may be premature. Miller Tabak + Co Chief Market Strategist Matt Maley says: "If history is a guide, President Trump will back away from his most aggressive stance. But I don't think it will happen unless there is some truly significant negative market action. So far, these moves have been very minor." Maley adds, Trump’s ambition on the Greenland issue seems particularly firm.
Papic argues that rising tensions with Europe may serve multiple purposes, one of which is to distract from domestic policy issues, including the Supreme Court’s upcoming ruling on Trump’s authority to impose tariffs. This move also comes as the White House has taken a series of disruptive actions, including pressuring the Federal Reserve and restarting trade rhetoric.
Nevertheless, some strategists remain calm. Tallbacken Capital Advisors CEO Michael Purves says: “The demands are always very aggressive, then he’ll eventually find some middle ground between the demands and the status quo. Ultimately, the question is whether these policies have a constructive impact on corporate earnings, or the opposite.”
Risk Warning and DisclaimerThe market has risks, investments need to be cautious. This article does not constitute personal investment advice, nor does it take into account individual users’ special investment goals, financial situations or needs. Users should consider whether any opinions, views or conclusions in this article fit their specific circumstances. Investment based on this is at your own risk.
