Why the TACO trade is riskier this time around
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Wall Street's belief that "Trump always chickens out" on tariff threats is keeping stocks afloat even as trade tensions with China heat up. But the TACO trade is riskier this time, says Bob Elliott, CEO of Unlimited Funds.
Why it matters: This may not be a repeat of April, when the stock market fell nearly 20% after President Trump announced sweeping global tariff, but it's a reminder of the risks that investors were happy to ignore in recent months.
Driving the news: Tensions between the U.S. and China flared after Beijing announced plans for new export controls on rare earths. Trump fired back, teasing out an additional 100% tariff on imports from China.
- On Friday, stocks sold off to the tune of $2 trillion, in the biggest one-day selloff since April. Then like clockwork, dip buyers showed up this week, until trade tensions returned.
What they're saying: "Were there not a substantial expectation of TACO, the market moves here would be substantially larger," Elliott tells Axios.
- The problem with TACO underpinning market resilience is that this time around, China is escalating tensions more than Trump, Elliott says.
- That means any resolution is less within Trump's control, which is critical for the TACO trade that relies on the president changing his mind.
Zoom out: This order of TACOs comes amid a riskier macro backdrop.
- The health of the labor market is unclear given the government shutdown, but private data indicates further weakness in hiring.
- Consumers are continuing to struggle and feel frustrated with higher prices, especially for staple goods such as groceries.
- Areas of the stock market that are tied to the "real economy" — like homebuilders and retailers — are starting to falter.
Threat level: "It's going to take a lot more than the AI narrative to be able to hold up the stock market if we see a combination of a meaningful weakening in domestic conditions plus escalating trade tensions," Elliott says.
- Remember, Big Tech stocks are driving the market right now, but not making money from AI just yet.
- "They get all their cash flows from traditional, real economy activities: advertising and retail sales," Elliott notes.
- That puts the companies driving the stock market at risk if consumers starts to falter amid any broader economic weakness.
Yes, but: The trade war heating up is "unnerving, but maybe also not fully unexpected," Dirk Willer, global head of macro strategy at Citi, tells Axios.
- "We are still hopeful that this will play out the way it played out the last time, without a major rift" between the U.S. and China, he adds.
- "There will be turbulence along the way, but this will be part of the economy navigating to clearer skies," José Torres, senior economist at Interactive Brokers, writes in a note.
What we're watching: How cyclical corners of the market will perform.
- Any further weakness in sectors tied to consumer health could be a sign of cracks in the economy that even the most bullish TACO investors can no longer rebuff.
