“TACO Trade” is the name of a market phenomenon that took shape in the opinion of market participants during Donald Trump’s second term. Loosely translated, it stands for “Trump always cowers.”
Donald Trump is known for his quick, frequent, unpredictable, and often reckless changes of heart or government policy on key issues. Following his comment that the “war in Iran” is “almost over,” the market reacted with momentary but clear euphoria.
Since their local peak, oil contracts have already lost over 30%. Is the market really pricing in the possibility that Trump might “pack up his toys” and forget about Iran, just as he forgot about the countless threats and promises he made in recent quarters? Iran is a completely different problem and commitment than anything Trump has undertaken before, and it may not allow itself to be ignored after Trump arbitrarily declares that his loosely defined goals have been achieved. It remains to be seen whether the president’s administration itself is aware of this.
However, there may be another reason for the reversal of many trends and the extremely muted reaction of part of the market, compared to what one might expect after the events we are witnessing.
The oil market reacted with a delay and in an adequate manner to the closure of the Strait of Hormuz. The situation on the debt market has also deteriorated, especially in Europe, which the market perceives as more sensitive to the energy crisis. The main indices, however, especially in the US, are only 5% below their historical highs today. There are several reasons for this. Movements in the debt market show that the market fears inflation: not as high as in 2022-2024, but just as persistent, and perhaps even more so, than it was then. This thesis is supported by the positioning and forecasts for agricultural commodity prices; another structural increase in food prices seems to be only a matter of time.
The Middle East remains critical to global trade and the economy, but this dependence is not as deep today as it was a few years ago. The Strait of Hormuz is the most important, but not the only, transport channel in the region, and the center of gravity for oil consumption has shifted from west to east. The stock market, on the other hand, is becoming less and less linked to trends in monetary policy or the broader economy. This can be seen in the relationships between commodity markets, debt markets, and stock markets.
However, the stock market does not necessarily share these concerns. The stock market is increasingly less dependent on investor sentiment, with growth fueled by factors such as year-on-year increases in share buybacks. The largest companies, especially technology companies, are also becoming increasingly insensitive to monetary policy: they are mainly fueled by their own record-breaking margins quarter after quarter and private capital at “off-market” rates. The digital goods that form the core of their revenues are also less dependent on supply chains than other sectors of the economy. Market leaders have learned to take advantage of globalization and favorable trends in monetary policy without suffering their negative consequences.
For the major indices to suffer double-digit losses, which many investors are waiting for, there needs to be a structural breakdown in the global economy or financial system, or some other paradigm shift that is difficult to define.
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