It was another week of policy pivots, back-and-forth trade headlines, and economic data that did little to anchor investor expectations. In the midst of the chaos, one phrase kept surfacing across Wall Street: the “TACO” trade.
An acronym for “Trump Always Chickens Out,” it captures a growing belief among investors that the president talks tough on tariffs but rarely follows through. That assumption has fueled a market tailwind in recent months as traders bet on policy pivots, buoyed by an initial US-China tariff deescalation earlier this month.
But that narrative hit turbulence this week when Trump lashed out at China in a post on Truth Social, accusing the country of having “violated” its trade deal with the US. While he did not provide specifics, the comments echoed earlier rhetoric from his administration suggesting that negotiations with Beijing had “stalled.”
Meanwhile, Bloomberg reported that the Trump administration plans to expand tech restrictions on China by targeting subsidiaries of already-sanctioned firms, aiming to close loopholes that allow Beijing to circumvent existing curbs. The news sent stocks sharply lower on Friday.
Still, despite those headlines, markets had largely been leaning into the idea that Trump’s tough talk rarely translates into tough action. It’s a bet that’s paid off: Stocks have not only erased their “Liberation Day” losses, but the S&P 500 (^GSPC) secured its best May since 1990 and had the best month since Nov. 2023.
But while some on Wall Street still lean into that pattern, others are warning that the trade’s logic may have run its course.
“We told Donald Trump that we have this ‘TACO’ trade,” Julie Beale, chief market strategist at Kayne Anderson Rudnick, told Yahoo Finance on Thursday, referencing a reporter’s question to Trump earlier in the week about the trade. In response, Trump slammed the term, defending his trade stance and brushing off the question as “nasty.”
“I worry [that] actually makes him bear down a little bit more and decide to be more resilient and more gripping on some of these tariff trades,” Beale said. “So I have a little bit of a concern that creates actually more uncertainty.”
For the most part, this uncertainty has worked in many investors’ favor, especially retail traders who have jumped in to “buy the dip” in record numbers, capitalizing on the familiar pattern of policy threats followed by swift deescalation.
“They’ve been able to take advantage of that,” Beale said. “A lot of people don’t want to be caught out on these big moves upwards.”
But uncertainty cuts both ways. Rapid policy shifts mean that while markets may continue to chase headlines, the downside risk could become significantly more pronounced if Trump decides to dig in his heels and hold firm on tariffs.
“This is a roller coaster ride,” S&P Global chief economist Paul Gruenwald said. “Not good for long-term planning and not good for corporate investment.”
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‘Overhang of uncertainty’
As investors weigh the fragile state of US-China relations, new questions emerged late Wednesday after a Manhattan-based trade court struck down a wide swath of Trump’s tariffs, citing legal issues with how they were implemented. Although a federal appeals court paused that decision on Thursday, temporarily allowing the tariffs to remain in place, the legal back-and-forth has added to market uncertainty.
“It’s really this overhang of uncertainty that’s putting a damper on investment and M&A activity,” Gruenwald said. “We’re seeing that in the sub-investment grade [credit markets] as well.”
Callie Cox, chief market strategist at Ritholtz Wealth Management, urged investors to look beyond the tariff drama.
“We’re going to get a lot of ‘he loves me, he loves me not,'” she said, referencing the back-and-forth on policy signals. “What investors really need to be focused on is economic data, especially the jobs report coming up next week, and what the Fed is doing in response to all of this data.”
Cox noted the Federal Reserve has limited ability to intervene if the economy weakens, adding, “Markets haven’t quite processed the fact that the Fed can’t step in and help us if the economy does end up weakening.”
For now, the “TACO” trade remains up for debate. But as the political stakes rise and legal, fiscal, and monetary realities collide, that trade may have less room to run.
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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