Stocks whipsaw as tariff news triggers TACO trade
Investors may not be fans of stock market volatility, but that doesn’t bother President Trump. His back-and-forth trade and tariff war updates have sent stocks on a roller coaster ride since he announced tariffs on Canada, Mexico, and China in February.
The stock market’s nerve-racking swings include a 19% tumble from mid-February through early April, and a 20% rally since April 9, when Trump paused many reciprocal tariffs that rocked stocks after they were announced on April 2.
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Investors have oscillated between pessimism that tariffs would send the U.S. into economic stagnation or recession, and optimism that negotiations would tame the worst of tariffs’ bite.
The seesaw pattern continued this week. Stocks tumbled on Friday, May 23, when Trump threatened 50% tariffs on the European Union, only to rally on Tuesday after Trump said he’d delay implementing them on the EU until July.
Related: Veteran fund manager who predicted April rally updates S&P 500 forecast
The volatility continued on Friday, May 30. The S&P 500 lost over 1% at session lows after Trump made a bold accusation on China trade, only to recover most of the day’s losses on hopes that cooler heads would again prevail over the weekend.
Image source: Spencer Platt/Getty Images
Will Wall Street’s TACO trade pay off again?
The on-and-off again nature of Trump’s trade war and the stock market’s reaction to it has led to investors buying dips to profit from potential easing of rhetoric amid negotiations.
Profitable dip buying has led to the coining of the “TACO” trade, where TACO stands for “Trump Always Chickens Out.“ The phrase is credited to Financial Times writer Robert Armstrong, who noticed the phenomenon.
Related: Jamie Dimon sends terse message on stocks, economy
The sell-off and rally from last Friday and Tuesday are perfect examples of the TACO trade in action.
Trump made a huge, eye-popping threat, only to back away from it, claiming positive trade talk developments. Those who bought low on the S&P 500 last Friday and sold high on Tuesday pocketed a quick 2.7%.
The returns were even better for those risk-tolerant enough to try their hands at technology stocks. Buying the dip in the Nasdaq 100 or high-flying artificial intelligence stock Palantir delivered 3.2% and 6%, respectively.
Stocks’ action on May 30 suggests many think that Trump’s latest tough talk toward China may be similarly walked back, resulting in gains.
The S&P 500 and Nasdaq finished May 30th up 1.3% and 1.5% from their intraday low. Palantir gained 6.1% from its low.
Trump sends strong message to China over trade
President Trump kicked off a major trade war with China in April when he set reciprocal tariffs at 34%, bringing total tariffs to 54%, including the ‘fentanyl’ tariff. China responded in kind, and the tit-for-tat eventually left China’s tariffs at 145% and China’s US tariffs at 125%.
Those rates were high enough to effectively shutter trade between the two economic giants, which caused ripples in supply chains, sending retailers heavily reliant on low-cost apparel and electronics scrambling.
Related: Secretary Bessent sends message on Walmart price increases due to tariffs
Absent relief, most began to assume a recession driven by tariff-driven inflation was inevitable.
Those fears were mitigated when Trump surprised everyone, announcing he would roll back China tariffs to 30% on May 14 for 90 days in a sign of good faith after what appeared to be positive initial trade talks.
Unfortunately, that optimism faded quickly after Trump delivered a stark rebuke of China on May 30.
“Two weeks ago, China was in grave economic danger! The very high Tariffs I set made it virtually impossible for China to TRADE into the United States marketplace,” wrote Trump on Truth Social. “I was what was happening and didn’t like it, for them, not for us. I made a FAST DEAL with China… Everybody was happy!… The bad news is that China, perhaps not surprisingly to some, HAS TOTALLY VIOLATED ITS AGREEMENT WITH US. So much for being Mr. NICE GUY!”
More Economic Analysis:
- Hedge-fund manager sees U.S. becoming Greece
- A critical industry is slamming the economy
- Reports may show whether the economy is toughing out the tariffs
Trump’s frustration with China is evident, and the implications for markets aren’t great. China may be negotiating tough, like Trump, so it may take longer to seal a deal, or the final agreement may not include much more in tariff relief. If so, recession worry will escalate.
Stock market participants, however, don’t seem concerned, embracing the TACO trade fully on Friday. Will that bet pay off? We’ll have to wait and see if Trump’s rhetoric eases over the coming days.
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
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