Assessing the TACO Trade's Flow and Price Action

The TACO trade-short for "Trump Always Chickens Out"-is a market flow pattern that emerged after President Trump's April "Liberation Day" tariff rollout and subsequent retreat. For nine months, investors have bet that his aggressive threats would collapse, allowing stocks to rebound to record highs. This pattern allowed the S&P 500 to nearly double from its 2022 lows, creating a powerful momentum that has been difficult to shake.

The trade now faces its clearest test in recent weeks. Last week, Trump pointed to the stock market's record highs as evidence his tariffs were "well received," a direct challenge to the TACO thesis. This shift in rhetoric, coupled with new tariff threats against European allies, triggered a 2.1% drop in the S&P 500 on Tuesday. The selloff was notable for its speed and the spike in volatility, with the VIX jumping to its highest level since November.

This event marks a potential inflection point. The market's muted reaction to the initial threat suggests the TACO trade's immunity may be weakening. Analysts note that without a repeat of the April sell-off that pressured Treasury markets, Trump may feel less emboldened to back down. The setup now hinges on whether a bigger, more chaotic rout is needed to remind him of market pain, as some strategists argue.

The Iran War Test: A New and More Complex Catalyst

The Iran war represents a fundamentally different kind of test for the TACO trade. Unlike tariff rollbacks, which are policy decisions Trump can instantly reverse, this conflict threatens global energy infrastructure and inflation-processes largely outside his direct control. The market's initial reaction, with stocks clawing back early losses, shows the TACO instinct is still present. But the core mechanism is now strained.

Marko Kolanovic, JPMorgan's former quant chief, captured the shift: Trump can fix very little in this scenario. The damage to oil infrastructure and the momentum of a regional war cannot be undone by a tweet. This is a crisis where the White House's ability to influence pain in financial markets is diminished compared to the pure policy lever of tariffs.

The bottom line is that the TACO trade's historical power relied on Trump having full control over a policy that could be instantly changed. In the Middle East, that control is fragmented. As one strategist noted, war has a momentum of its own once it starts. The market's fate now hinges more on the unpredictable course of the conflict and its impact on oil prices than on any immediate presidential pivot.

Catalysts and Risks: What to Watch for the Trade's Survival

The TACO trade's survival now depends on a clear signal: either a de-escalation in Middle East tensions or a shift in Trump's rhetoric toward retreat. The market's initial bounce after the Iran attack suggests the instinct is still alive, but it's a fragile one. The key will be whether Trump's control over the narrative and policy outcomes returns. If he can credibly promise to "fix" the situation, the relief rally pattern may reassert itself. If not, the trade's relevance fades.

Monitor oil prices and global bond yields as the primary pressure points. Goldman Sachs analysts note that oil prices around $80 will start to hurt the global economy, raising inflation and slowing growth. Sustained high energy costs could force a broader market correction regardless of Trump's stance, as they directly pressure corporate profits and consumer spending. Watch for a break above $90 or a sustained move above $85 as a potential trigger for a more severe sell-off.

The trade's viability hinges on whether Trump's tolerance for market pain increases. The analyst who said it would take a market-induced recession or a stock drop of 10-15% to pressure him remains the benchmark. The current muted reaction to tariff threats is the trade's lifeline. If that reaction hardens into a sustained sell-off, it will test the core assumption that Trump always chickens out. For now, the setup is precarious, with the trade surviving on the expectation that he will back down before the pain becomes too severe.