Wall Street's "TACO" Trade Hot New Craze or Recipe for Disaster?

The 'TACO' Trade: How to (Potentially) Profit From Trump's Tariff Rollercoaster

Stock market investors in the second Trump term haven't had much to celebrate. Between unpredictable policy shifts and volatile market reactions, navigating the financial landscape has felt like traversing a minefield. However, a peculiar trading strategy has emerged from the chaos, offering a potential silver lining: the 'TACO' trade.

What is the 'TACO' Trade?

Coined by Financial Times columnist Robert Armstrong, 'TACO' stands for "Trump Always Chickens Out." The strategy hinges on the observation that Trump's tariff announcements often trigger market dips, followed by a recovery when he inevitably reverses course. As Armstrong quipped, "Acronyms are very powerful, especially when they remind people of foodstuffs."

Here's how the TACO trade works:

• Step 1: Buy the dip – purchase stocks at lowered prices immediately following a Trump tariff announcement.
• Step 2: Sell at higher prices after Trump's expected backtracking pushes stocks back up.

A History of Tariff Turmoil (and Opportunity)

The effectiveness of this strategy was underscored by the market's response to Trump's threat to impose a 50% tariff on imports from the European Union. On May 23, the day of the announcement, the S&P 500 fell by more than 39 points (0.67%), and the Nasdaq dropped 188.53 points (1%).

However, just two days later, Trump deferred the tariff increase until July 9. The following Tuesday, after the Memorial Day holiday, stocks surged. The S&P rose 118.72 points (2.05%), and the Nasdaq jumped nearly 462 points (2.47%).

This pattern isn't isolated. Consider the events of early April. On April 2, Trump announced "reciprocal" tariffs on every U.S. trading partner, some as high as 50%. The market reacted negatively, with the S&P falling nearly 5% and the Nasdaq down almost 6% – the worst day since March 2020.

Yet, on April 9, Trump reversed course, announcing a 90-day pause for bilateral negotiations. This triggered a "TACO relief rally," with the S&P gaining 474 points (9.52%) – its third-biggest one-day percentage gain since World War II – and the Nasdaq soaring 1,857 points (12.16%), its second-biggest one-day percentage gain ever.

The Risks and Realities

While the TACO trade might seem like a foolproof plan, it's not without its risks. Investors may be hesitant to fully embrace it, fearing that "this time the tariffs will stick." Sen. Adam Schiff even raised concerns about potential insider trading related to advance knowledge of Trump's tariff flip-flops.

Moreover, the back-and-forth of tariffs can have long-term consequences. As one expert noted, with confidence in U.S. economic growth shaken and the international trade system thrown into upheaval, "there's no telling about the long-term ramifications of Trump's trade war."

Lessons Learned

Despite the uncertainties, Trump's tariff policies offer some valuable lessons for investors:

• Don't panic over short-term, Trump-driven market dips. As money manager Ben Carlson pointed out, those who panic-sold after Trump's "liberation day" tariff announcement missed out on the entire year's market gain.
• Recognize that Trump often "speaks loudly and carries barely any stick at all." His threats may seem severe, but he often backs down.

Ultimately, the TACO trade highlights the importance of understanding the political landscape and remaining calm in the face of volatility. While it's impossible to predict the future with certainty, recognizing patterns in Trump's behavior may offer a way to navigate the turbulent waters of the stock market.

In conclusion, while the long-term economic ramifications of Trump's trade policies remain uncertain, the TACO trade serves as a compelling reminder of the market's capacity to adapt and potentially even thrive amidst political unpredictability. It encourages investors to think critically, act strategically, and, perhaps most importantly, maintain a sense of humor in the face of ever-shifting economic winds.

Tags: Stock market crash, Trump tariffs, S&P 500, Nasdaq, Market drop, Economic impact, Trade war, Financial news, 2020 crash, Market recovery

Source: https://finance.yahoo.com/news/hiltzik-explaining-newest-wall-street-100000657.html