I wish every harder day only took an hour
And I’m not just like the people I resent
I wish someday I could truly be empowered
To say exactly what, it is I meant
–Ben & Ellen Harper, “Learn It All Again Tomorrow”
One of the best lessons I ever learned about how markets really work can be encapsulated in the following maxim: “Money always goes to where it’s treated best.” On Tuesday (5/27), money flowed back to where it is treated best, and that means back into equities. And it did so with vengeance, as the S&P 500 spiked 2.05%, lifting all major S&P 500 sectors along the way.
The reason for that bullish Tuesday surge has now become a bit of a banality, as it was the now-familiar move in the Trump tariff era of reversing a stance on trade policy. Indeed, a reversal, or postponement, or reduction, or alteration of a proposed tariff rate from President Trump has become so commonplace that Wall Street now has created an acronym for it. Hey, Wall Street loves acronyms, and its latest en vogue expression is the following: TACO Trade, which stands for Trump Always Chickens Out.
The idea here is that President Trump makes hyperbolic tariff proposal on a goods coming from major U.S. trading partners (China, the EU, Mexico, Canada, etc.). But within a matter of days, he backtracks and either delays the implementation or exempts enough goods that the tariff itself loses much of its bite.
According to the TACO Trade thesis, the best way to play those hyperbolic Trump tariff statements and eventual reversals is to “buy the dip,” because the president will inevitably reverse his stance, which will cause money to flow back into equities.
Yet is this TACO Trade situation really true? Well, the answer, so far, is yes.
Consider that the president started this meme of sorts by exempting United States-Mexico-Canada Agreement (USMCA) goods from additional Mexico/Canada tariffs, and that had the effect of dramatically reducing the impact of the initially proposed tariffs on our bordering neighbors. Mr. Trump then postponed all of the so-called “reciprocal tariffs” against U.S. trading partners just a week after the now-infamous Rose Garden “Liberation Day” announcement.
Shortly thereafter, the president reduced the truly exorbitant Chinese tariffs just a few weeks after their implementation. Then, on Memorial Day weekend, Mr. Trump backed off yet again, this time on his threat of 50% tariffs on the European Union (they were delayed till July 9, which is the expiration date for the rest of the reciprocal tariff exemptions).
Now, if we analyze the TACO Trade here (i.e., the buy-the-dip thesis), we see that it has indeed worked quite nicely. The following data comes to us courtesy of my friends at Sevens Report Research, a group whose publications I unequivocally recommend.
Consider…
- The S&P 500 has gained 2% since the March 4 tariffs on China and Mexico.
- The S&P 500 has rallied nearly 10% from the April 2, “Liberation Day” declines and 11% from the date Trump announced 145% tariffs on China (April 11).
- The S&P 500 is higher than it was prior to last Friday’s 50% EU tariff threat.
Here we can once again see that money always goes to where it’s treated best, as the returns here are indeed conclusive: the TACO Trade has worked, and buying stocks on extreme tariff-related threats has been a smart trade.
Now the question becomes, will the TACO Trade continue to work? The answer is, yes, it most likely will.
I say that because of another Wall Street maxim that’s consistently operating, and that is that “history doesn’t always repeat, but it often rhymes.” In this case, history suggests that the president will treat tariffs as a threat, or a negotiating tool, if you prefer. Whatever you call it, I don’t think Mr. Trump will follow through on tariff threats that become destabilizing or extreme, as he knows what happens to markets when he does.
Finally, one thing I want to note here is that just because the TACO Trade appears to be in place, that doesn’t mean we no longer need to worry about tariffs or a trade war. And just because the president has consistently backed off the most extreme tariff threats, the Overton Window on tariff normalcy has been altered, and altered for the worst, in my view.
Consider that right now, there are 10% tariffs (import taxes paid by American companies) in place for all U.S. trading partners with 35% tariffs on Chinese imports and 25% tariffs on steel and non-USMCA products from Canada and Mexico (energy products are tariffed at 10%). And while none of these are as intense as the original threats, they are all still much higher than they were pre-Trump. And while we do not yet know what those tariffs will do to the economy or inflation, my suspicion is they won’t result in positive economic data.
The takeaway here is that the TACO Trade should not lead us into complacency about the negative effects of tariffs and the trade war, as just because something isn’t as bad as feared, it doesn’t mean it isn’t bad.
So, while we can take advantage of this situation by buying the dip after extreme Trump tariff toutings, the wider and long-term reality that the tariff burden for the U.S. economy and globally is at multi-decade highs will slow growth and boost inflation—and that is a new paradigm we all must contend with going forward.
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Because Things Happen
“Bad things, like good things, don’t happen any more often than they ought to by chance. The universe has no mind, no feelings and no personality, so it doesn’t do things in order to either hurt or please you. Bad things happen because things happen.”
–Richard Dawkins
As humans, we are pattern-seeking animals always in search of the answers to our “why” questions. Yet sometimes, the answer is just “because things happen.” Acceptance of this concept is something that Eastern philosophical traditions embrace. Yet in the West, we don’t tend to feel much comfort from this detached view of existence.
In my opinion, there are things we can control (very few things, as it turns out), and things we cannot control (most things). And learning the difference between them is part of becoming a wise human.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,
Jim Woods
