Wall Street’s TACO Strategy Encounters Challenges It Helped Create

Wall Street’s “TACO” Trade Faces New Uncertainty

For nearly nine months, a strategy known as the “TACO” trade—short for “Trump Always Chickens Out”—has consistently delivered positive results for investors. This approach gained traction after the U.S. president’s cycle of imposing and then retracting global tariffs last April. Investors began to largely ignore the administration’s more dramatic threats, continuing to favor riskier assets despite the political noise.

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However, some market participants are starting to question the reliability of this strategy. If investors assume that President Trump will always reverse course before markets suffer significant losses, then there may never be a downturn severe enough to force him to change direction, as happened with tariffs last year.

The recent push by Trump to acquire Greenland, along with threats of tariffs against European partners, has heightened concerns among investors. On Tuesday, markets reacted sharply: the S&P 500 dropped by 2.1%, the dollar weakened, and volatility surged. Although futures suggested a modest recovery for Wednesday, the recent selloff may not have lasting effects.

Some analysts argue that for the TACO trade to remain effective, a more dramatic and disorderly market decline may be necessary to remind the president of the consequences seen in April.

“Is this just another round of TACO? Absolutely,” said Marko Papic, chief strategist at BCA Research. “But we might need a significant downturn, similar to a ‘Liberation Day’ event, before the situation resolves.”

Papic suggests that escalating tensions with Europe could serve several purposes, including diverting attention from domestic challenges such as an upcoming Supreme Court decision on Trump’s tariff powers—a ruling that could have broad implications.

This latest episode follows a series of disruptive moves from the White House, including pressure on the Federal Reserve and renewed trade rhetoric, all while markets remain well above last spring’s levels. The S&P 500 has nearly doubled since its 2022 lows and is close to record highs, leaving little margin for error. Meanwhile, according to a recent Bank of America survey, hedging against a market downturn has reached multi-year lows, leaving many investors vulnerable as volatility returns.

Signs of TACO’s Waning Influence

Tuesday’s market drop was the strongest indication yet that the TACO strategy’s protective effect may be fading. The S&P 500 erased its gains for 2026, the VIX volatility index hit its highest point since November, gold set a new record, and the dollar experienced its worst two-day performance in about a month. Additionally, a selloff in Japanese long-term yields—driven by changing inflation expectations—sparked fresh concerns about global borrowing costs.

Many believe that the continued faith in TACO is one reason markets haven’t fallen further. Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle, noted that investors have come to expect Trump to retreat in the face of market turmoil. “Without TACO, we’d likely see lower Treasury yields as investors seek safety, and a much bigger spike in volatility,” he said. He also observed that while foreign investors are hedging currency risk, they are still holding onto U.S. credit, indicating that few are abandoning American assets despite political uncertainty.

This confidence, Al-Hussainy explained, is why risk premiums remain compressed even as uncertainty grows.

While many still expect the president to pull back before markets experience significant damage, some warn that this assumption may be premature. Matt Maley, chief market strategist at Miller Tabak + Co., commented, “If history is any guide, President Trump will retreat from his most aggressive positions. However, I don’t think that will happen unless the markets experience more substantial declines. So far, the moves have been relatively minor.” Maley also pointed out that Trump’s ambitions regarding Greenland seem particularly resolute. “Those expecting him to back off on Greenland as he has in the past may be mistaken,” he said.

Despite the market’s lofty levels, which may make it more vulnerable than during last April’s tariff-driven drop, measures of expected volatility show that investors had grown complacent. The cost of insuring against sharp declines remains only slightly elevated, and the VVIX index, which tracks volatility of volatility, is well below the peaks seen in previous selloffs.

Some strategists remain unfazed. Michael Purves, CEO of Tallbacken Capital Advisors, remarked, “The initial demands are always aggressive, but the outcome usually lands somewhere between the original ask and the status quo. Ultimately, it comes down to whether the policies will support earnings or hinder them.”

Reporting assistance by Geoffrey Morgan and Lu Wang.

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