TACO strategy failed? Wall Street discovers the harsh reality: To make Trump back down, may require a larger market meltdown.

The TACO trading strategy on Wall Street has continued to show steady profitability for nearly nine months. However, recently, some market participants have begun to realize the paradox hidden in this strategy: if the core idea of "TACO" is to keep investors calm in the face of the aggressive policy signals repeatedly released by Trump, then the market might struggle to generate enough volatility to force the president to compromise, as was seen during last year's tariff dispute. It is understood that "TACO" stands for "Trump Always Chickens Out," and it emerged after the U.S. President introduced and quickly withdrew a global tariff policy in April last year. This term quickly became a slogan for investors, who chose to ignore the White House's more extreme threats and continued to buy high-risk assets. Now, Trump is trying to acquire Greenland and threatening to impose tariffs on European allies, actions that have deepened the market's sense of urgency. On Tuesday, the market saw a significant downturn, with the S&P 500 index falling 2.1%, the dollar exchange rate plummeting, and market volatility increasing. Although U.S. stock index futures indicate a moderate rebound on Wednesday, this sell-off may not last long. Some believe that in order for the TACO trading strategy to continue to exist, a larger, more chaotic market crash may need to occur first, to remind Trump of the market turmoil he caused in April. "This TACO must be at work again, oh, absolutely," said Marko Papic, chief strategist at BCA Research. "But I think we might have to go through a market crash like a 'D-Day' scenario before hitting the bottom." Papic points out that the ongoing escalation in Europe may have multiple strategic intentions, with one important consideration being to shift the domestic focus the Trump administration currently facing a crucial ruling on the legality of tariffs, a decision that the Supreme Court is about to make that could have far-reaching implications for U.S. trade policy. Another key driving factor is that while market valuations have significantly risen since the spring of 2024, the White House has taken a series of policy actions that have exacerbated market volatility, including pressuring the Federal Reserve and frequently releasing trade policy signals. Despite the S&P 500 index nearly doubling from its 2022 low and continuously running near historic highs, market risk tolerance has significantly narrowed. Meanwhile, the latest investor survey from U.S. banks shows that hedge positions in the stock market have dropped to the lowest levels in years, leaving most investors lacking effective risk mitigation mechanisms in this week's market fluctuations. Tuesday's sell-off signals that the "immunity" of TACO may be weakening, the most obvious sign yet. The S&P 500 index erased all gains since 2026. The VIX index, which measures expected stock market volatility, soared to its highest level since November of last year. Gold hit a historic high, the dollar experienced its worst two-day decline in about a month. To add to the woes, long-term Japanese government bond yields fell, relating to changes in Tokyo's inflation expectations, sparking new concerns about global borrowing costs. Some believe that the lack of a larger market decline is due to investors' confidence in TACO. Ed Al-Hussainy, portfolio manager at Columbia Threadneedle, said that investors have factored in Trump's policy retreat into their responses to policy shocks. "Without TACO," he said, "we would see a decrease in bond yields due to safe-haven purchases, while volatility would soar." He pointed out that foreign investors hedge their currency exposure but continue to hold U.S. credit assets, indicating that few are giving up on U.S. assets even in times of political uncertainty. Al-Hussainy added that this confidence helps explain why, despite increasing uncertainty, risk premiums remain low. While many still believe that President Trump will back down before the market suffers significant damage, some warn that this idea may be premature. Matt Maley, chief market strategist at Miller Tabak + Co., said, "If history is any guide, President Trump will retreat from his current most aggressive stance." But he added, "I think this won't happen unless there's some clear downside movements in the market. So far, these movements have been very mild." Maley also noted that Trump's ambitions for Greenland seem particularly firm. "Those who think he will retreat on the Greenland issue as he has in the past may be mistaken," he said. However, the current market's high levels may expose it to greater risks than during the decline caused by tariffs in April last year. The S&P 500 index is approaching historic highs, and the volatility expectation index clearly shows how complacent the market has become. Although there was a surge on Tuesday, the premium (skew) that investors pay to guard against sharp declines remains only slightly elevated. The VVIX index, which measures the volatility of volatility itself, is much lower than the peak levels during the sell-offs of April, October, and November. Some strategists remain firm in their positions. Michael Purves, CEO of Tallbacken Capital Advisors, said, "His demands are always very aggressive, but the end result tends to fall between the demands and the reality. The key is whether these policies ultimately benefit or harm profits."