<The 'Trump always chickens out' trade is the talk of Wall Street. Here's one way to play it.
Provided by Dow Jones May 28, 2025, 9:29:00 AM
By William Watts
Tariff threats may still offer near-term opportunity but won't determine market's next big move, strategist says
Let's hear it for the TACO trade.
Wall Street loves a catchy acronym, and the TACO trade, coined earlier this month by Financial Times columnist Robert Armstrong, has captured the mood as investors and analysts attempt to make sense of the roller-coaster market action that has followed President Donald Trump's sweeping tariff threats and subsequent walk-backs.
It stands for "Trump always chickens out." The idea is that investors have profited by buying the dip that has followed Trump's tariff threats.
Does Trump always chicken out on his tariff threats? So far, the answer is yes, said Tom Essaye, founder of Sevens Report Research, in a Wednesday note.
He noted Trump exempted goods subject to the U.S.-Mexico-Canada Agreement from additional tariffs on Mexico and Canada, significantly reducing their sting; he postponed all "reciprocal" tariffs against U.S. trading partners just a week after his market-shaking "liberation day" announcement on April 2; he slashed exorbitant China tariffs a few weeks after implementation; and over the weekend, Trump delayed a 50% tariff on imports from the European Union until July 9 after threatening Friday to put the levy in place on June 1.
Stocks soared on Monday, in part due to relief over the EU tariff delay. Last month. The S&P 500 SPX is up 2% since Trump's March 4 announcement of tariffs on Canada, Mexico and China. It's up nearly 10% after its post-"liberation day" declines and has gained 11% from Trump's April 11 announcement of 145% tariffs on China. The index ended Monday 3.6% below its record close of 6,144.15 set on Feb. 19.
"So, the returns are somewhat conclusive: The TACO trade has worked and buying stocks on extreme tariff-related threats has worked," Essaye wrote.
Will it continue to work?
Maybe, but investors and traders need to tread carefully because the existence of the TACO trade means tariff-inspired declines should be more shallow than was previously the case, Essaye said.
As market economist David Rosenberg of Rosenberg Research put it in a Wednesday note: "The question is, at what point will the President's credibility become impaired because you only get so many tries at kicking the tariff can down the road ... As for the markets, they are playing the role of dog in President Trump's impersonation of Ivan Pavlov."
But, Essaye noted, history does suggest Trump won't follow through on tariff threats that are destabilizing or extreme, he said. Instead, they appear to be part of a negotiation strategy that centers on threatening absurdly high tariffs in an effort to achieve a more moderate goal - a strategy that seems to be working, Essaye said.
Essaye said that while the TACO trade has worked, investors shouldn't get complacent. Don't look past the fact that the tariff burden is now higher and will slow growth and inflation, he said.
Investors can play the TACO trade in the short term by buying cyclical sectors, such as consumer discretionary XLY, tech XLK, financials XLF, and energy XLE, which tend to get hardest after tariff threats but tend to bounce back biggest, he said, recommending they spread a full position out over the course of a day or two after the initial threat.
What about a long-term play? The best bet there is to ignore the TACO trade, Essaye said.
"What will determine the next 15%-20% in this market isn't Trump's tariff talk. Instead, it's the economy and whether it can hold up amidst tariffs, policy volatility, higher interest rates, no Fed rates cuts and pressure on consumer spending," he said.>
https://www.morningstar.com/news/marketwatch/20250528174/the-trump-always-chickens-out-trade-is-the-talk-of-wall-street-heres-one-way-to-play-it |
