Wall Street in 2025 has developed a peculiar, albeit profitable, relationship with the trade policies of former President Donald Trump. Dubbed the “TACO trade”, an acronym for “Trump Always Chickens Out”, this strategy capitalizes on the predictable pattern of market dips following Trump's initial tariff threats, followed by sharp rebounds when he ‘inevitably' softens his stance or delays implementation.
This strategy has become a meme of sorts, and an informal market play, essentially encouraging investors to “buy the dip” on tariff headlines, betting that the administration will back off and markets will recover.
The “TACO trade” itself isn't a stock or ETF, but rather a market phenomenon or strategy observed and exploited by astute investors. It works on the premise that Trump's aggressive tariff rhetoric, while initially rattling markets, ultimately gives way to more moderate approaches, leading to a swift recovery in asset prices. When Trump issues new tariff threats, risk assets, particularly stocks, often experience a sharp decline. However, history has shown that these threats are often followed by Trump backing down or delaying implementation, triggering a robust rally in equity markets.
A case in point is the market's reaction to Trump's “Liberation Day” tariffs announced on April 2nd. The S&P 500 plummeted over 12% in response. However, the announcement of a 90-day tariff pause on April 9th sparked a furious rally, resulting in the best single day for the S&P 500 in nearly 20 years. Similarly, in mid-May, after a trade deal framework with China lowered tariffs for 90 days, stocks recovered all April losses, with the S&P 500 rising over 1% since then.
The emergence of the “TACO” acronym has even inspired a series of satirical terms reflecting investor sentiments toward the administration's policies. These include “MEGA” (Make Europe Great Again), indicating renewed investor interest in European markets, and “FAFO” (F Around and Find Out), encapsulating the chaotic nature of market behavior under Trump's governance. These acronyms symbolize broader feelings of uncertainty and speculation in financial markets.
Despite the market's fascination with the “TACO” acronym, President Trump has unsurprisingly rejected the characterization, asserting that his shifting positions are part of a strategic negotiation process. When questioned about the term, he dismissed it as a “nasty question” and emphasized that his tactics have attracted significant investment to the U.S. economy.
Possible Upsides of TACO Use
- Predictable Pattern: Trump's history of softening tariff threats creates predictable market dips.
- Swift Recoveries: Subsequent walk-backs lead to rapid market rebounds.
- Profitable Opportunities: Savvy investors can capitalize on short-term volatility.
- “Run It Hot” Environment: Continued tariff retreats support growth-oriented assets.
Potential Downsides of TACO Use
- “Priced In” Risk: Market efficiency could diminish returns as walk-backs become expected.
- Policy Uncertainty: Unpredictability remains a constant threat.
- Potential for Escalation: Risk of Trump following through on tariffs could lead to significant losses.
- Reliance on Political Factors: Investment strategy heavily dependent on political dynamics.
However, the market's embrace of the “TACO trade” has led to a situation where some analysts believe it's becoming “priced in,” meaning investors are already anticipating the eventual walk-backs and factoring them into their investment decisions. This raises concerns about the potential for diminished returns as the market becomes more efficient in predicting Trump's moves.
The “TACO” phenomenon has had tangible effects on stock markets. For example, the S&P 500 index experienced a 15% dip in April 2025 due to policy uncertainty stemming from tariff threats and subsequent reversals. Such volatility underscores the significant influence of trade policy announcements on market performance.
Looking ahead, market watchers are closely monitoring upcoming US-China and US-EU negotiations. Analysts suggest that if Trump’s pattern of walking back tariffs continues, growth-oriented and risk assets may continue to benefit, supporting a “run it hot” economic environment.
The “TACO trade” exemplifies the intricate relationship between political decisions and financial markets. Investors' ability to anticipate and respond to policy-induced market fluctuations highlights the importance of understanding political dynamics in investment strategies.
As the administration continues to navigate complex trade negotiations, the market is watching closely, ready to either feast on the “TACO” or brace for a potentially spicy surprise.
