The TACO trading strategy has continued to demonstrate robust profitability on Wall Street, a trend that has now persisted for nearly nine months. Recently, however, some market participants have begun to perceive a paradox inherent in this strategy: if the core premise of "TACO" is to keep investors calm in the face of President Trump's repeatedly aggressive policy signals, then the market may be prevented from experiencing the severe volatility necessary to force the President to concede, as he did during last year's tariff dispute. The acronym "TACO" stands for "Trump Always Chickens Out," a term that emerged after the U.S. President announced, then swiftly revoked, a global tariff policy in April of last year. This phrase quickly became a mantra for investors, who chose to ignore the White House's more extreme threats and continued purchasing high-risk assets.
Now, with Trump's attempts to acquire Greenland and his threats to impose tariffs on European allies, markets are gaining a deeper appreciation for the urgency of these events. On Tuesday, markets sold off sharply, with the S&P 500 index falling 2.1%, the U.S. dollar plunging, and market volatility intensifying. Although U.S. stock index futures pointed to a modest rebound on Wednesday, this sell-off may not last long. Some believe that for the TACO strategy to remain valid, a larger, more chaotic market crash might first be required to remind Trump of the market turmoil he triggered back in April.
"Is this TACO at work again? Oh, absolutely," said Marko Papic, Chief Strategist at BCA Research. "But I think we might need a market crash akin to a 'Liberation Day' event before we hit a bottom." Papic noted that the escalating situation in Europe could have multiple strategic intentions, with one key consideration being to divert domestic attention—the Trump administration is currently facing a crucial Supreme Court ruling on the legality of its tariff powers, a decision that could profoundly impact U.S. trade policy.
Another critical driver is that, while market valuations have risen significantly since the spring of 2024, the White House has adopted a series of policies that exacerbate market volatility, including pressuring the Federal Reserve for intervention and frequently signaling shifts in trade policy. Even though the S&P 500 has nearly doubled from its 2022 lows and continues to trade near all-time highs, the market's threshold for risk tolerance has noticeably narrowed. Concurrently, the latest Bank of America investor survey shows that equity hedge positions have fallen to multi-year lows, leaving most investors without an effective risk buffer during this week's market gyrations.
Tuesday's sell-off suggests the "immunity" offered by TACO may be waning, representing the clearest sign yet of its potential failure. The S&P 500 erased all of its gains for 2026. The VIX index, a gauge of expected stock market volatility, surged to its highest level since last November. Gold hit a record high, while the U.S. dollar suffered its worst two-day losing streak in about a month. Compounding the situation, a decline in Japanese long-term government bond yields, linked to shifting inflation expectations in Tokyo, sparked fresh concerns about global borrowing costs.
Some argue that the primary reason the market decline wasn't more severe lies in investors' enduring faith in TACO. Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investments, stated that investors have already factored Trump's policy reversals into their reactions to policy shocks. "Without TACO," he said, "we would see Treasury yields fall on safe-haven buying, alongside a significant spike in volatility." He noted that foreign investors are hedging their currency exposure while maintaining holdings of U.S. credit assets, indicating that few are abandoning U.S. assets even during political uncertainty.
Al-Hussainy added that this confidence helps explain why risk premiums have remained low despite growing uncertainty. Although many still believe President Trump will retreat before the market sustains significant damage, some warn that this assumption may be premature. "If history is any guide, President Trump will back down from the most aggressive positions he's taking now," said Matt Maley, Chief Market Strategist at Miller Tabak + Co. However, he added, "I don't think that happens unless we see some definite negative action in the market. So far, that action has been very minor."
Maley also suggested that Trump's ambition regarding Greenland appears particularly steadfast. "Those who think he'll back down on Greenland like he has in the past are probably mistaken," he stated. Nevertheless, the market's current elevated levels may make it more vulnerable than during the tariff-induced decline in April of last year. With the S&P 500 near record highs, expectations for volatility clearly indicate how complacent the market has become. Despite Tuesday's spike, the premium investors pay for protection against a sharp decline, known as skew, has only risen slightly. The VVIX index, which measures the volatility of volatility itself, remains well below its peaks during the sell-offs in April, October, and November.
Some strategists remain steadfast in their outlook. "His demands are always aggressive, but the final outcome is often somewhere between the demand and the status quo," said Michael Purves, CEO of Tallbacken Capital Advisors. "The key is whether these policies ultimately prove to be favorable or unfavorable for earnings."
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