Will Trump TACO for the stock market? Wall Street is not very optimistic this time
Wall Street strategists warn in unison: This time, don't expect Trump to compromise to save the market. War is different from tariffs—once it starts, it has its own momentum, and the White House finds it hard to "turn off the switch." Soaring oil prices threaten inflation and suppress interest rate cut expectations, compounded by concerns over AI prospects and slowing employment, putting pressure on U.S. stocks. Analysts assert that U.S. stocks need to drop at least 10% to 15% to truly touch Washington's nerves
The U.S. military strikes against Iran have intensified market turmoil, but Wall Street strategists are warning: this time, do not expect Trump to back down to save the market.
Although U.S. stocks rebounded from intraday lows on Tuesday, analysts believe there is a fundamental difference between the Iran war and the previous trade war—once a war begins, it has its own momentum, and the White House's control over the situation is far less flexible than with tariff policies.
The S&P 500 index closed down 0.9% on Tuesday, having previously fallen as much as 2.5% during the day. The sharp rise in oil prices is threatening to exacerbate U.S. inflation and cast a shadow over expectations for the Federal Reserve to resume interest rate cuts.
Several strategists have stated that the current market decline is not sufficient to trigger substantial alarm in Washington. Matt Gertken, chief geopolitical and U.S. political strategist at BCA Research, pointed out that a decline that triggers the risk of a "market-induced recession"—specifically, a drop of about 10% to 15% in U.S. stocks—is needed to create real pressure on the White House.
"TACO Trade" Logic Faces Challenges
In recent months, whenever Trump's policies have caused market turmoil, traders have developed a conditioned reflex expectation: as long as the stock market drops deep enough, Trump will back down. This strategy has been dubbed the "TACO trade" by the market, fostering a buy-the-dip mentality that has repeatedly pushed stocks to recover lost ground.
Whether it was the trade war, threats to invade Greenland, or challenges to the independence of the Federal Reserve, investors have bet that Trump would ultimately soften his stance under market pressure. In April of this year, a massive market sell-off did indeed force Trump to temporarily shelve his tariff plans, further reinforcing this logic.
However, the Iran war has shattered this framework. Bob Elliott, chief investment officer at New York investment firm Unlimited, stated: "This brings to mind the classic saying about war—once it starts, it has its own momentum. The ability to influence and respond to market pain may not be as deft as during the April trade conflict, because at that time, Trump had complete control over policy choices."
War Risks Cannot Be "Turned Off" with a Button
The U.S.-Israel joint bombing campaign against Iran has sharply destabilized the Middle East and could inject a new round of inflationary shocks into the U.S. economy by pushing up oil prices. The Trump administration has indicated that the bombing campaign could last for weeks, but has yet to provide a clear explanation of the conditions that could end the conflict.
On Tuesday, Trump announced that the U.S. would provide insurance guarantees and naval escorts for tankers and other vessels passing through the Strait of Hormuz, attempting to curb the potential energy crisis triggered by the conflict. However, the sharp rise in oil prices has raised doubts in the market about the Federal Reserve's path to interest rate cuts, while U.S. stocks had already been under pressure due to concerns over artificial intelligence prospects, localized pressures in the credit market, and slowing job growth.
Baird investment strategist Ross Mayfield warned that the risk of large-scale damage to Middle Eastern oil infrastructure could cause the effects of the war to continue to fester, regardless of how quickly the conflict itself ends. Keith Buchanan, a portfolio manager at Globalt Investments, compared the current Iran conflict to the Russia-Ukraine war—both have driven up energy prices, exacerbated inflation, and contributed to the significant stock market decline in 2022 against the backdrop of aggressive interest rate hikes by the Federal Reserve Buchanan bluntly stated that Trump "does not have control over the shutdown switch," and "there are other very powerful parties involved, which is deeper and more lasting than other situations."
The decline needs to be "much deeper" to alert the White House
Despite market turmoil, analysts generally believe that the current decline has not yet reached the threshold that would truly alert Washington. Gina Martin Adams, Chief Market Strategist at HB Wealth Management, stated, "It needs to drop much deeper before it really becomes his trouble. It really needs to be much deeper." John Briggs, Head of U.S. Rates at Natixis, believes that a "destructive rise in bond yields that spreads to the credit and equity markets" is needed to prompt Trump to seek an exit from the conflict.
Steve Sosnick, Chief Strategist at Interactive Brokers, pointed out that Tuesday's market movements continued the previous pattern: "As with every sell-off, after the initial wave of declines, dip buyers step in at reasonable support levels, and FOMO-driven traders push the initial rebound further up."
However, strategists warn investors not to overly rely on historical experience. Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist at Morgan Stanley, noted that as long as the rise in oil prices compared to the same period last year does not exceed 75%, the stock market typically performs well during past Middle Eastern conflicts.
