The “TACO” Trade: A Market Analysis on Trump’s Tariff Strategy
As Wall Street grapples with the volatility that has become synonymous with President Donald Trump’s trade policies, a new acronym is making the rounds: the “TACO” trade, succinctly standing for “Trump Always Chickens Out.” Coined by Financial Times columnist Robert Armstrong, this catchy term reflects a growing sentiment among investors that the President often retracts his aggressive tariff threats, leading them to profit by buying the dip that follows such announcements.
Understanding the TACO Trade
The crux of the TACO trade hinges on the observation that Trump’s tariff-related threats have, on numerous occasions, resulted in market declines that quickly reverse when he decides to dial back on the proposed tariffs. Tom Essaye, founder of Sevens Report Research, lends credence to this notion in a recent analysis, noting that Trump has indeed backed off or delayed imposing harsh tariffs on key trading partners.
Essaye points out how Trump exempted critical goods associated with the U.S.-Mexico-Canada Agreement from potential tariffs on both Mexico and Canada. Additionally, the President postponed “reciprocal” tariffs just a week after dramatically announcing them on April 2. The most recent move came when he decided to delay a proposed 50% tariff on EU imports until July 9, following market upheaval driven by his earlier threats. Following the holiday weekend, stocks rose sharply, buoyed by the news of the tariff delay and the S&P 500 climbing nearly 10% since the post-liberation day declines.
The Market Reaction
The market returns suggest a clear conclusion: the TACO trade has worked, and buying stocks during tariff-induced declines appears to be a sound strategy. The S&P 500 has seen a 2% increase since Trump’s March 4 tariff announcements and nearly a 10% rise after the initial market dip stemming from his threats. Essaye’s advice to take advantage of cyclical sectors like consumer discretionary, technology, financials, and energy for short-term gains appears sound in light of this data.
But, Will It Last?
The lingering question for investors revolves around the sustainability of this tactic, particularly in light of its recent popularity. As more individuals become aware of the TACO trade, the depth of tariff-inspired declines may become shallower, requiring more caution. Market economist David Rosenberg takes this caution a step further, suggesting that the President’s credibility may eventually dwindle if he consistently fails to follow through on his threats. After all, one can only stretch the credibility rope so far before it snaps.
The Future Beyond the TACO Trade
Essaye’s analysis reveals a more intricate layer to the TACO trade. While it has historically led to profitable opportunities for savvy investors, it is imperative to remain vigilant and not grow complacent. As the tariff burden escalates, it will inevitably impact economic growth and inflation rates. Investors are thus urged to embrace a balanced outlook, weighing short-term gains against long-term economic realities.
For those looking for long-term plays, Essaye makes a compelling case for stepping back from the TACO trade altogether. He asserts that the trajectory of the market in the coming months will be predominantly influenced by traditional economic indicators—namely the health of the economy, interest rate policies, and consumer spending pressures, rather than Trump’s tariff rhetoric alone.
Conclusion: A Conservative Strategy
In the ever-changing landscape of financial markets, the TACO trade stands as a testament to the unpredictability exacerbated by political maneuvering. Yet, investors should remain grounded in fundamental economic principles rather than relying solely on the whims of presidential proclamations. The bottom line? Stay informed, remain cautious, and invest wisely based on proven financial strategies rather than transient market fads. The road ahead may be riddled with uncertainty, but a strong foundation in traditional market analysis will always be a solid shield against volatility.
