The TACO Trade (Trump Always Chickens Out): Is it a Real Thing and How Can Investors Capitalise?

We just had to write about the so-called TACO Trade (Trump Always Chickens Out). Now this is a piece of market slang rather than a formal theory, but it captures a very real behavioural pattern that traders observed during Donald Trump’s presidency, especially from 2018 onward.

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What is the TACO Trade?

At its core, TACO  describes a recurring market dynamic. Trump would announce or threaten an aggressive policy (tariffs, trade wars, sanctions, government shutdowns, NATO withdrawal rhetoric), markets would sell off sharply, and then—after political pushback, economic pressure, or negotiations—he would water it down, delay it, carve out exemptions, or reverse course, triggering a rebound. Over time, investors began to anticipate the reversal, turning the pattern into something tradable.

This wasn’t about whether Trump “lost” or “won” politically. It was about credible threats colliding with economic constraints. Markets learned that there was often a gap between rhetoric and execution…but they often forgot it in the heat of the moment.

Is the TACO Trade real?

It’s real in the sense that markets repeatedly priced in worst-case outcomes that didn’t fully materialise, then repriced once reality softened. Examples include incidents where the government shutdown and re-opened, there’d be a lot of panic that would subside when there was a compromise.

Then there has been escalations and de-escalations in the trade wars (by de-escalations we mean deals and/or exemptions). And also, any pressure on the Federal Reserve and its chairman Jerome Powell.

That said, it did not work every time. Some tariffs did stick. Some damage was real. Which is why TACO was always  probabilistic trade. Nonetheless, some investors won.

Traders who leaned into TACO typically did three things. First, they bought amidst fear, not headlines. When markets sold off hard on rhetoric alone—without legislation passed or enforcement mechanisms in place—some investors bought risk assets (equities, EM FX, cyclicals) on the assumption of eventual de-escalation.

Second, they focused on timing asymmetry. The sell-offs were often fast and emotional; reversals slower and relief-driven. That asymmetry favoured patient capital over headline traders.

Third, they used unique financial derivatives, particularly options. This was because outcomes were often binary. And so sophisticated investors could use call spreads, volatility compression trades, or downside-protected structures to express the “chicken out” view without betting the farm.

Has anything like this happened before?

It is easy to think no, but this has happened many times including in recent memory. Investors may recall the rises and falls of European markets during the Brexit negotiations. Extreme headlines drove volatility; repeated delays and watered-down outcomes created tradable swings. Sticking with Europe, speculation that the Eurozone crisis could be the end of the Euro flamed up often but simmered when there were compromises.

Those with longer memories may recall Cold War nuclear brinkmanship. Markets periodically priced existential risk, then repriced once de-escalation prevailed.

What makes TACO distinctive is how explicit and frequent the signalling was, and how directly Trump used markets as a feedback mechanism. He openly cited stock prices as validation, which made investors believe there was a self-correcting loop.

But here’s the crucial nuance: TACO worked because Trump was constrained by markets he cared about. If any future leader cares less about markets, has more institutional power, or is willing to absorb economic pain for ideological goals, then the pattern will break. TACO is not just about the fact that a leader like Trump exists, but that he ‘chickens out’ so markets regain what they lost.

That’s why professional investors treat these dynamics as regime-specific, not eternal truths. The moment markets stop being the referee, TACO stops working.

The deeper lesson

TACO isn’t really about Trump. It’s about this fact: That markets don’t just price fundamentals. They price human behaviour under constraint.

When investors can model incentives, ego, political survival, and feedback loops; markets can move dramatically before anything actually happens—and then reverse just as violently.

That’s not irrational. It’s probabilistic.