The Taco theory of Trump’s trade policy is cold comfort to banks

President Donald Trump’s trade policy injected volatility into markets earlier this spring, but some Wall Street investors have become skeptical of whether the most drastic tariffs proposed will materialize.

But even as investors become more comfortable with the president’s negotiating style, the absence of certainty is keeping banks from following through on strategic moves like M&A. 

The strain of complacency toward Trump’s tariff policies has gained attention in recent weeks through a slogan coined by Financial Times columnist Robert Armstrong: Trump Always Chickens Out, or Taco. Armstrong said the rally following Trump’s suspension of his “Liberation Day” tariff policy is evidence that the market does not believe that the president will tolerate large market losses in pursuit of his trade goals. 

“The recent rally has a lot to do with markets realizing that the U.S. administration does not have a very high tolerance for market and economic pressure, and will be quick to back off when tariffs cause pain,” Armstrong said. “This is the Taco theory: Trump Always Chickens Out.”  

That theory has reassured some equity investors that the administration’s frequent revisions to duties on imports into the country are more of a negotiating tactic than permanent policy stance. But experts say banks face a uniquely chaotic policy environment that paralyzes mergers and long-term investments.

“Because the potential impact is so great on some of these things, you still have to — even if you have high conviction that he is going to chicken out, or there is going to be an avoidance of the worst-case scenario — the even small probability has to be weighed,” policy analyst Ed Mills of Raymond James said. “What I tell clients is: you’re on a roller coaster, you have to expect the unexpected and you can never be all clear when Donald Trump is setting policy.”

Since the president imposed across-the-board tariffs on a number of nations on April 2, the administration has withdrawn a number of the most stringent levies on American trading partners, including Mexico, China and Canada.

According to analysis from the Washington Post, the president’s team has altered or reduced tariffs more than 50 times since he came into office, with many of the changes being short-lived. 

“I do believe that policy volatility on trade is now a feature, or a fact of life, that investors have to deal with. I think there’s a recognition that trade policy can turn on a dime, and investors just have to take that into account,” said Ian Katz, managing partner at Capital Alpha Partners. “If investors like a change in tariff policy, that usually means that it’s good for the economy, and that probably means it’s at least somewhat good for banks.”

Many bank stocks rallied after Trump’s win in November amid hopes for deregulation and a more straightforward M&A process, yet merger activity has stalled since the beginning of the year, Mills said.

“For the banks, the biggest trade coming out of the election … was a wave of consolidation within the banking industry and M&A really picking up materially in Trump 2.0. We really haven’t seen that many deals because of this uncertainty,” Mills said. “You can draw a direct line between capital markets, revenue of banks and the number of banks who have entered into merger agreements, to the volatility that is being caused by the Trump administration.”

Todd Baker, senior Columbia University fellow and managing principal of Broadmoor Consulting, said he is skeptical of the premise underlying the Taco theory because the policy uncertainty brought on by the tariff negotiations hasn’t actually been ameliorated with any firm commitments. While some market participants who aren’t banks may be bracing for Trump to “chicken out,” banks can’t plan around maybes, meaning policy and politics play a “bigger role than ever” in investment decisions, he said.

“This is wreaking havoc with traditional corporate investment timelines and adds risk to any endeavor that continues for more than an election cycle,” Baker said. “I was the head of strategy for several large banks and can tell you from personal experience that banks have never before faced such a level of policy uncertainty. This makes long-term strategic investment decisions more akin to a lottery than a science.”

Mills said the issue isn’t just tariffs but the way they’re introduced. Because markets are still unsure of what Trump’s desired policy outcome is, it is difficult to know whether satisfactory negotiations can be reached. That lack of a clear policy destination vis-a-vis tariffs means volatility will likely continue, he said. 

“When the market is focused on process, that’s when we see the most volatility. When they’re focused on outcome, that’s where we see less volatility in more of the conversations about the ability to look through some of the day-to-day headlines,” Mills said. 

“What I’ve experienced in my 15 years of doing this, is when something is new to the market, they focus more on process, and as they develop some level of pattern recognition — as they live through multiple cycles of an issue — that’s when they start to focus on the outcome,” Mills said.

Mills compared the tariff uncertainty to the markets’ reactions to the 2012 debt limit standoff — a similarly thorny issue that had investors reacting to daily headlines. Now, as with tariffs, markets mostly ignore the noise and focus on the eventual outcome — though that complacency may also mask deeper volatility risks. Mills said a federal court’s decision last week to suspend some of Trump’s tariffs because they overstep his executive authority has calmed markets somewhat.

“There is a sense, like, ‘All right, we’re going to focus on the outcome,'” Mills said. “And while the market might not necessarily like the outcome, they feel as if they have processed the worst-case scenario and we’re moving towards something between what was announced on April 2 and the status quo.”

But not everyone sees clear signals in the recent market movements. Baker struck a more skeptical tone, cautioning against reading too much into short-term price shifts, especially in a fast-changing policy environment. 

The stock market has performed well over the last several decades despite upheaval, Baker said, and many institutional and retail investors take for granted that market investments will grow in the long run. The market’s resilience, then, may have less to do with Trump’s policies or negotiations than it does with the market’s belief in its ability to recover. 

“Those looking for long-term guidance about fast-moving situations like the administration’s tariff teeter-totter in equity price movements are likely to be disappointed,” he said, noting stock investors are inherently risk-takers and equity markets frequently misread risk. “It will take a lot to convince investors who have benefited from 15 years of rising equity values to take a pessimistic long-term view.”

But while equity markets may be more optimistic by their nature and thus more inclined to believe that Trump’s trade policies will work out in the end, bond markets — which are typically more risk-averse — have also experienced uncommon volatility in recent months. Because Treasury yields have a direct impact on the core functions of banking, Mills said those markets are likely the more instructive ones for bankers to watch going forward.   

“How Treasuries are trading have a direct impact on interest income and interest margin, the entire profitability of the banking sector is tied to the direction and rate of change,” Mills said. “So the level of volatility that we’re seeing within treasuries has added a lot more questions than a lot of bank analysts had expected.”