Wall Street investors are rapidly mastering the rhythm of responding to Trump's policy threats. The recent Greenland tariff episode saw a reversal from threat to retreat in just days, far shorter than the typical 4-to-6-week cycle, as the "TACO" (Trump Always Chickens Out) mindset has become deeply embedded in market pricing mechanisms.
On Wednesday, January 21st, Eastern Time, Trump announced that he had reached a framework agreement with NATO Secretary-General Rutte regarding Greenland, thereby temporarily suspending a tariff hike plan on European countries that was set to take effect on February 1st. Following a meeting with Rutte in Davos, Switzerland, Trump stated he would not, for the time being, proceed with the planned tariffs on the eight European nations opposing the U.S. acquisition of Greenland as originally scheduled. The day before, U.S. stock markets lost over $1 trillion in a single day, marking one of the most severe sell-offs since April. Although Trump dismissed the decline as "peanuts," the timing of the policy shift underscored the influence of market volatility on his decision-making.
"There is a clear sensitivity in the administration to stock market movements," said Kristina Hooper, Chief Market Strategist at Man Group, which manages $214 billion in assets. "This was very evident in the decision to back down." Karl Schamotta, Chief Market Strategist at Corpay, noted that Trump's comments on Wall Street's reaction "sent a signal; it hit a nerve."
This dynamic is altering market behavior patterns. Investors are growing increasingly confident that Trump will capitulate under market pressure, while simultaneously being forced to adapt to more extreme policy threats. Jason Bobora-Sheen, a Portfolio Manager at Ninety One, warned, "The risk for the market is that this dynamic might one day bring the 'wolf' closer than expected."
The market turbulence triggered by Trump's Greenland tariff threat prompted a swift reversal in policy stance. Following Tuesday's loss of over $1 trillion in U.S. stocks, Trump had abandoned the tariff plan against European allies by Wednesday afternoon.
White House spokesperson Kush Desai defended the move, stating, "Anyone who doubts President Trump's willingness to follow through when others refuse to make a deal should ask Maduro or Iran what they think."
Investors first experienced "TACO" during the market turmoil after April 1st. At that time, the scale and scope of Trump's trade war shocked investors, causing U.S. stocks to plummet and impacting the Treasury market. However, the subsequent rebound was equally fierce, inflicting heavy losses on investors who had sold stocks.
Global investors have grown accustomed to the pattern of Trump's policy announcements—typically made on weekends when stock, bond, and currency markets are closed.
Charles-Henry Monchau, Chief Investment Officer at Swiss bank Syz, previously described a 4-to-6-week "Trump tariff cycle timeline": starting with a "shock phase" where stocks fall and volatility rises, followed by reassurances from U.S. officials, and concluding with a resolution promise.
"This time [the Greenland incident] was much shorter," Monchau noted. "Perhaps because the stakes are too high for everyone."
Other instances include the single-day drop in the U.S. dollar last July when reports surfaced that Trump had inquired with lawmakers about the possibility of firing Fed Chair Powell. The dollar quickly rebounded after Trump stated he had "no intention of taking any action."
Luca Paolini, Chief Strategist at Pictet Asset Management, pointed out:
"The difference now compared to then is that Trump has much less political capital. With midterm elections approaching, the pain threshold is much lower."
Some investors worry that the prevalence of the TACO expectation might weaken the market's ability to respond to economic or political shocks. During the peak of the Greenland crisis, one government bond market investor said they tried to "proactively tune out all the Greenland noise"—and indeed, the bond market reaction was milder than that of the stock market.
Michael Krautzberger, Chief Investment Officer for Public Markets at Allianz Global Investors, had stated before Trump's retreat this week:
"If I were advising certain European governments, I would say: you almost need to create a bit of market volatility, because Trump is very sensitive to it, more so than other politicians."
When Trump returned to the U.S. on Thursday, the S&P 500 closed up 0.6%. Futures indicated a further 0.2% rise on Friday.
Facing this new normal, some cross-market investors are opting to tactically reduce positions ahead of high-risk speeches and events, while maintaining long-term holdings in commodities like gold that may benefit from increased uncertainty.
Gold continued its record-breaking rally this week, rising even after Trump's policy shift on Greenland, trading near $5,000 per ounce.
Trevor Greetham, Head of Multi-Asset at Royal London Asset Management, said he has been buying gold to hedge against the risk of Trump pursuing certain extreme policies, such as limiting Federal Reserve independence during the tenure of Powell's successor.
"It feels like the market is a bit like a frog in gradually heating water, with the temperature constantly rising," he said. "[The risk is] you become immune to triggers that 10 or 20 years ago would have prompted a fairly significant sell-off."
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