Markets, Volatility, and the Return of the “TACO” Trade

This week has been a reminder that successful investing is less about reacting to political noise and more about maintaining discipline through periods of volatility. Markets once again digested a familiar pattern: aggressive policy rhetoric, a sharp sell-off, and a rapid reversal once cooler heads prevailed.

As global leaders convened in Davos for the World Economic Forum, attention was drawn to renewed tensions surrounding Greenland. A series of provocative messages from the US president, clearly timed for maximum visibility, reignited fears of escalating trade friction. Those concerns intensified over the weekend with threats of 10% tariffs on eight European countries, rising to 25% later this year. Markets responded swiftly. US equities fell, the dollar weakened, and volatility spiked as investors briefly priced in a more confrontational outcome.

The reversal was just as swift. By midweek, the administration walked back the proposed tariffs after signalling a framework for negotiation. Global equities rallied, and what market participants have dubbed the “TACO” trade – Trump Always Chickens Out – reasserted itself. While the phrase may be flippant, the underlying behaviour is now well recognised: policy escalation followed by de-escalation once market stress becomes evident.

It is important, however, to treat this as an observation, not a strategy. Behavioural patterns can persist and then fail. Tactical traders may seek to exploit short-term dislocations, but long-term investors should remain focused on fundamentals.

This brings us back to a recurring question: does this environment warrant a structural shift away from the United States? Our view remains unchanged. Investors do not make enduring allocation decisions based on political theatre. Valuations, earnings power, innovation, and capital discipline matter far more. While US equity valuations are elevated in parts of the market, the US remains the world’s largest economy and home to many of its most strategically important companies. The depth of its capital markets and the concentration of intellectual property, particularly in areas such as artificial intelligence, continue to underpin its relevance in global portfolios.

The broader lesson is one of process. Policy noise can create short-term volatility and occasional opportunity, but long-term wealth creation is driven by diversification, risk management, and patience. In environments where headlines can move markets within hours, clarity of strategy matters more than ever.

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