President Donald Trump is once again brandishing the tariff stick, threatening to impose hefty duties on a wide range of US imports, from copper and pharmaceuticals to goods from Japan and Russia. But Wall Street seems remarkably unfazed, with many investors betting that Trump will, as he has done before, back down from his most aggressive threats.
This muted reaction is indicative of what's become known as the "TACO trade," short for Trump Always Chickens Out. The market's expectation is that Trump will steer the US towards the brink of economic disaster, only to pull back at the last minute and claim to have saved the day.
Michael Block, market strategist at Third Seven Capital, explained to CNN that this is exactly what happened in early April. Trump's announcement of sky-high "Liberation Day" tariffs sent shockwaves through the market, leading many to believe a recession was imminent. The ensuing market panic, affecting both stocks and bonds, ultimately convinced Trump to reverse course. He abruptly froze those "reciprocal" tariffs for 90 days, triggering a significant market recovery that continues to this day.
Deja Vu All Over Again?
Now, we're seeing a "Liberation Day" sequel. US stocks dipped on Monday after Trump sent letters to Japan, South Korea, and a dozen other nations outlining tariffs scheduled to take effect on August 1. However, the sell-off was relatively mild, representing a modest correction from recent all-time highs.
On Tuesday, the markets barely reacted as Trump threatened a 50% tariff on copper, suggested a tariff of up to 200% on pharmaceuticals, and promised a 10% tariff on Brazil, China, India, Russia, and other members of the BRICS economic club.
The TACO Trade Endures
“At the end of the day, no one really anticipates most of these tariffs will go into effect. The TACO trade is still the market’s expectations,” said Ed Mills, Washington policy analyst at Raymond James. The question now is whether Trump will follow the familiar script or deliver a surprising plot twist.