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The "TACO trade"— a strategy based on the acronym "Trump Always Chickens Out," has gained attention among traders attempting to capitalise on market volatility driven by the U.S. President Donald Trump’s tariff announcements.
While this approach has delivered short-term gains for some, it is fraught with risks and limitations that make it an unreliable long-term investment strategy.
Let’s explore the mechanics of the TACO trade, its pitfalls, and why a more disciplined, business-focused approach may be a better alternative.
What is the TACO Trade?
The TACO trade revolves around a predictable pattern observed during Trump’s tenure:
- Market Reaction to Tariffs: When Trump announced or threatened tariffs, markets like the S&P 500 would typically decline due to fears of trade disruptions and economic uncertainty.
- Buying Opportunity: Traders using the TACO strategy would purchase stocks during these dips, betting that Trump would eventually soften his stance or delay implementation.
- Market Rally: Once Trump reversed course or paused tariffs, markets would rebound, allowing traders to profit from the recovery.
Examples in Action
- April 2, 2025: Trump’s “Liberation Day tariffs” caused the S&P 500 to drop over 10%. Less than a week later, he paused the tariffs for 90 days, triggering a 9.5% surge in the index in a single day.
- May 12, 2025: A 90-day truce between the U.S. and China led to another significant market rally as tariffs were reduced on both sides.
The term was coined by Financial Times columnist Robert Armstrong and quickly gained traction on Wall Street as a trendy trading tactic.
Why the TACO Trade is a Trap
While the TACO trade has delivered short-term profits, it is fundamentally flawed as a sustainable investment strategy. Here’s why:
Loss of Edge:
- Widely Recognised Patterns Lose Effectiveness:
Once a trading strategy becomes mainstream, its advantage diminishes. If all traders anticipate the same market recovery, prices adjust almost instantly, turning the strategy into a race to execute trades faster rather than a reliable method for consistent returns.
- No Predictive Power:
The TACO trade relies heavily on Trump’s unpredictable behaviour, which cannot be accurately forecasted. Political decisions are inherently volatile and subject to change without warning.
Risks of Market Timing
- Missing Key Days:
Attempting to time the market is notoriously risky. According to Hartford Funds, missing just the 10 best days in the stock market over 30 years could reduce an investor’s returns by more than half compared to staying fully invested.
- Emotional Decision-Making:
Market timing often leads to emotional trading, where fear and greed drive decisions rather than rational analysis.
Failure of Formulaic Trades
- Historical Precedents:
Popular, formula-based strategies like the "Dogs of the Dow" have historically failed once they gained widespread adoption.
Investors preemptively buying recommended stocks drove up prices, reducing potential returns. Similarly, the TACO trade is vulnerable to becoming ineffective as more participants adopt it.
A Better Alternative: Long-Term Business Investing
Rather than chasing short-term trends like the TACO trade, a more reliable approach is to invest in strong, fundamentally sound businesses.
This strategy focuses on the underlying growth and profitability of companies rather than speculative market movements.
FAANG Stocks as a Case Study
| Basis of Strategy | The TACO Trade | FAANG Investing |
|---|---|---|
| Foundation | Based on unpredictable political actions | Based on fundamental business growth (e.g., free cash flow) |
| Performance | Short-term gains tied to market volatility | Over the past decade, FAANG stocks delivered average returns of over 900%, supported by robust FCF growth |
| Approach | Requires speed and market timing | Requires patience and a long-term horizon |
The success of FAANG stocks (Meta, Amazon, Apple, Netflix, Alphabet) was not due to catchy acronyms but because these companies consistently demonstrated innovation, scalability, and strong financial performance.
Lessons from the TACO Trade
Investing is a Marathon, Not a Sprint
- Volatility is Inevitable:
Data shows that while the S&P 500 has a 95% chance of experiencing a bear market (a 20%+ decline) within any given 10-year period, it has also delivered positive returns 93% of the time over rolling 10-year periods since 1950. Volatility is the price investors pay for long-term gains.
- Patience Pays Off:
Successful investing requires discipline and the ability to remain invested through periods of uncertainty. Chasing quick wins through strategies like the TACO trade often leads to suboptimal outcomes.
Focus on Fundamentals
- Strong Businesses Outperform Trends:
Instead of relying on political whims or market timing, focus on companies with solid fundamentals, such as growing revenue, strong free cash flow, and competitive advantages.
- Avoid Trendy Acronyms:
The allure of catchy phrases like "TACO" can distract from the importance of thorough research and sound investment principles.
Bottom Line
The TACO trade exemplifies the dangers of market timing and reliance on unpredictable external factors like political decisions. While it may offer occasional short-term gains, it is ultimately a risky gamble unsuitable for long-term wealth building.
In contrast, investing in fundamentally strong businesses, like those represented by FAANG stocks, provides a proven path to sustainable growth.
By focusing on patience, discipline, and sound fundamentals, investors can avoid the pitfalls of trendy trades and achieve lasting success.
The takeaway? Don’t fall for the trap of the TACO trade. Stick to what works: investing in great businesses and letting time do the rest.
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