Stocks continued to rally on Thursday as investors breathed a sigh of relief over the detente with Greenland.
After threatening to take over the Danish territory either by force or coercion, President Trump backed off as it appeared that the U.S and Europe had reached an understanding on Greenland. Trump had proposed a 10% tariff on eight European countries, but that's off the table after an agreement that seems to allow the U.S. to own small pieces of land in Greenland, on which it can build military bases.
Image source: Getty Images.
TACO wins again
This pattern of Trump making threats that roil Wall Street only to back down from them has become so common that it has an acronym, TACO, or Trump Always Chickens Out. In this case, the S&P 500 (^GSPC 1.35%) fell nearly 2% on Tuesday over Trump's saber-rattling, but then regained nearly all of those losses over the next two sessions.
Savvy investors have capitalized on such movements in the past by buying the dip when Trump sinks the market by making threats.
The best example of this was President Trump's "Liberation Day" tariffs announcement, which pushed the S&P 500 down 10% over the next two sessions last April, though the stock soared the following week after the president announced a pause on those tariffs.
The TACO cycle repeated in several trade tiffs with China, and the temporary ban on Nvidia and AMD exporting AI chips to China.
Trump's positioning seems to be part of his negotiating tactics as he stakes out a position to gain leverage in order to get a long-term agreement he finds favorable. But the TACO trade also shows he's willing to listen to investors, as the fallout from the Liberation Day announcement showed. When investors felt blindsided, it seemed to convince him to pull back on the blanket tariffs.
What it means for investors
While the TACO trade has been reliable, there's no guarantee that it will continue to work in investors' favor. Trump has declared himself a fan of tariffs and has implemented them to the extent that no other modern president has.
Still, the pattern here is clear, and buying the dip has proven to be a smart strategy for investors even when TACO isn't involved. The next time stocks tumble on a threat from Trump, scooping up a stock on your watch list or a few shares of an S&P 500 ETF could be a smart move.
