The TACO trade is still a spicy one, as seen in the sudden stock market rally Wednesday, after President Trump dropped his threat to impose tariffs on eight European allies over Greenland.
Why it matters: Yet if investors always assume Trump will "chicken out" on market-unfriendly policies, they will have removed one of the major causes of the president backing down: themselves.
What they're saying: "The market has gotten comfortable, maybe naively," Trevor Slaven, global head of asset allocation at Barings, tells Axios, adding that investors seem to think 70% of Trump's policies are "just bluster."
- The other 30% is when Trump takes steps toward a more "aggressive approach" only to walk that back after getting checked by either the market or other advisors, Slaven says.
Between the lines: Relying on the market to make Trump change his mind is a challenge for a group of investors who are getting all too used to pricing in less aggressive policies before they even soften.
Catch up quick: Stocks kicked off the shortened holiday week with their worst single day performance since October.
- Yet it's not clear this move was all about Greenland and the tariff threat. Treasury yields climbed amid a global bond selloff, weighing on stocks, after investors had earlier fled Japanese bonds.
- Stocks surged Wednesday after Trump posted that a meeting with NATO secretary general Mark Rutte had produced a deal on Greenland and that he would abandon his tariff threat.
- The S&P 500 rose 1.2%, its biggest gain since November.
Zoom in: "Greenland was another piece of noise until tariffs entered the picture," Steve Sosnick, chief strategist at Interactive Brokers, tells Axios.
- The market "can act as a check on the president's economic policies" but beyond that, the market is not a stopgap preventing Trump from doing anything, he adds.
- Sosnick's clients came in and bought the dip at the start of the week as they priced in a softer approach from Trump even before he indicated in his Davos speech that he would not use force to take Greenland.
Reality check: The market is bad at pricing in geopolitical risk, Sosnick says. That doesn't necessarily mean investors are confident Trump will back down.
- It could just mean they're not properly pricing in risks, which is especially true when confidence in a quick policy retreat is the default assumption.
Threat level: When asked whether war was enough for investors to sell off riskier assets, Ed Al-Hussainy, portfolio manager at Columbia Threadneedle, says no.
- If even the threat of war won't change investor sentiment, what will?
The bottom line: Betting on a market downturn to force a Trump retreat may prove slower — and riskier — than investors are pricing in.
