What Is the TACO Trade on Wall Street—and How Can You Play It?

Wall Street has found its latest acronym—and it's as spicy as it sounds: the TACO trade, short for "Trump Always Chickens Out."

Originally coined by Financial Times columnist Robert Armstrong, the term captures a recurring market pattern during Donald Trump's recent return to the tariff stage: stocks plunge following Trump's aggressive tariff threats, only to rebound sharply when he later softens or delays those actions. Investors who recognize this cycle early have been able to buy the dip and ride the rebound—a strategy that has, so far, worked surprisingly well.

Anatomy of the TACO Trade

The pattern emerged clearly in 2025 as Trump began floating bold protectionist moves amid his campaign rhetoric. For example:

- On a Friday in late May, Trump vowed to slap a 50% tariff on EU imports, sending markets tumbling.

- By Sunday, after a "good call" with European Commission President Ursula von der Leyen, he delayed the tariff deadline to July 9, sparking a rally.

- On Tuesday, as U.S. traders returned from Memorial Day, the Dow jumped 721 points (1.73%) in relief.

A similar sequence played out in April, when Trump announced "Liberation Day" tariffs, triggering a sharp selloff. That downturn reversed after the tariffs were placed on hold. Later, China tariffs that began at 145% were quickly scaled back following backlash, and goods from USMCA partners were mostly exempted.

As Tom Essaye of Sevens Report Research noted, "So, the returns are somewhat conclusive: The TACO trade has worked and buying stocks on extreme tariff-related threats has worked."

Trump's Reaction—and His Strategy

Trump, when asked about the label, bristled:

"You call that chickening out?" he responded, citing how EU leaders "called up and said, 'Please let's meet right now'" after his threat.

Whether one sees it as a retreat or a tactic, the broader market seems to interpret Trump's tariff theatrics as part of a calculated negotiation approach. Essaye puts it this way:

"They appear to be part of a negotiation strategy that centers on threatening absurdly high tariffs in an effort to achieve a more moderate goal."

That means these market dips, sparked by extreme rhetoric, often don't last—and savvy investors are now anticipating this.

How to Trade It

So, how can investors position themselves for the TACO trade?

Short-Term Strategy: Buy the Dip

Essaye recommends looking to cyclical sectors—industries like consumer discretionary, technology, financials, and energy—which tend to sell off sharply after tariff announcements but also rebound quickly.

"Traders should spread a full position out over the course of a day or two after the initial threat," he advises.

Timing is key. Once a threat hits the headlines, quick execution matters. But as the TACO trade becomes more well-known, the resulting sell-offs may become shallower and the rebounds less dramatic.

As economist David Rosenberg warns: "At what point will the president's credibility become impaired...? You only get so many tries at kicking the tariff can down the road."

Long-Term Strategy: Stick to Fundamentals

Despite the short-term gains, Essaye cautions against relying on the TACO trade long term. The real market drivers will be economic resilience, Fed policy, interest rates, and inflationary pressures.

"What will determine the next 15% to 20% in this market isn't Trump's tariff talk. Instead, it's the economy," he notes.

Even if Trump backs off tariffs, the mere threat raises uncertainty, burdens businesses, and can elevate inflation expectations—making macro fundamentals all the more important.

Conclusion: A Tactic, Not a Thesis

The TACO trade has become a talking point on Wall Street for good reason—it's been predictive and profitable in the short term. But it's no silver bullet. Investors should view it as one tactical lens in a broader market strategy. Understand the pattern, but don't lose sight of the fundamentals.

Or to put it simply: Trade the dip, but don't forget the data.