Friday evenings are when Pam and I usually have our sons, Luke and Ben, for dinner. The menu naturally caters to what they like, which means homemade pizzas, burgers or Mexican. After this week’s developments I think we will serve tacos, which is appropriate given that we got to see yet another replay of the market’s favourite dish. The acronym "TACO" (Trump Always Chickens Out) refers to the simple thesis that the President views the equity market as his real-time approval rating. When he threatens extreme action, like tariffs, and the market acts as a "vigilante" by tanking, he walks it back. If the market ignores it, he proceeds.

Well, after days of sabre-rattling over taking over Greenland, by purchase or forced annexation, the Europeans weren’t having it. With feathers ruffled, the disruptor-in-chief announced tariffs on all nations that went against his desire to have the icy island. With US markets closed for Monday’s Martin Luther King holiday, the weekend news hit hard come Tuesday and stocks fell sharply. Market pundits, who were full of bravado only days before, were now running comparisons between this week and last April when Trump gave us a new definition of “liberation day”. A day later, after a laborious and Nyquil-inspired speech to the annual Davos World Economic Forum, Trump walked back not only the tariff threats, but also any notion of taking Greenland by military force. Result? Stock markets rebounded strongly. Call it TACO 2.0 or TACO leftovers, but I think this might be a spicier dish.

Investors use TACO almost like an algorithm. Sell when the tariff threat is announced and then buy on the walk-back. Last April was a perfect example of this, but we can go back to Trump’s first term for some historical context. Take Mexico in 2019, probably the original proof-of-concept. On May 30th, Trump tweeted 5% tariffs on all Mexican imports unless illegal immigration stopped. The S&P 500 fell 1.3% the next day and auto stocks were down close to 4%. On June 7th, just 48 hours before tariffs were set to go live, they were "indefinitely suspended" after a face-saving deal. The threat was the leverage, the market drop was the cost and the deal was the exit ramp. Back then, you bought GM and Ford when Mexico was threatened.

This week, it was European luxury brands. Case in point, automaker BMW fell roughly 7% intraday Monday on Trump’s threat of a 10% tariff rising to 25% by the summer. Keep in mind, this is on top of the 15% tariff already in place. Trump also threatened a 200% tariff on European wines and spirits, hence LVMH’s share price was knocked down more than 4% on Monday. When Trump “chickened out”, both stocks rebounded more than the benchmark European index. The movements in both are illustrated in the chart below. The question is whether there is a difference in flavour between the 2019 TACO, or last April for that matter, and what we are being served today?

When we prepare the tacos tonight, there will be a broad array of toppings, from lettuce, onions and Monterey Jack cheese to salsa and peppers. The salsa is usually mild, and the peppers don’t cross the habanero line. Once, on vacation in Jamaica, Pam and I did a hot pepper tasting and tried something called a ghost pepper. Not for the faint of heart, nor stomach, the defining characteristic of a ghost pepper isn't just the heat, it’s the delayed fuse. You take a bite, and for 30 seconds, you think you’re fine. Then the burn kicks in and incapacitates you.

We saw the initial "bite" this week with Greenland: a sharp market drop followed by a soothing "walk back" rally. Investors today feel a little calmer and some may even go so far as to say they feel “safe”. But what if the ghost pepper risk is lurking in what the market is ignoring, namely non-trade geopolitical issues. Think Venezuela and Iran.

The market is devouring the "buy the dip" trade, assuming every threat is a bluff. That works until it doesn't. Venezuela proved the President will pull the trigger if the market doesn't scream in pain first. When we saw the first images of boats being blown up in the waters off Venezuela and then talk of a potential military action against the country, market reaction was little to none. In fact, on the Monday following the Saturday invasion, the S&P500 closed higher. The point is that with markets pushing higher during the threat phase, Trump had the green light to move ahead.

In the case of Iran, Trump threatened around the time of the Venezuela incursion to attack if more protesters were killed. That stance softened on the administration’s reporting that killing had stopped. However, this week, Trump sent the aircraft carrier USS Abraham Lincoln through the Strait of Malacca and on Tuesday came out with a statement that if Iran ever succeeded in assassinating him, that “Iran would be wiped off the face of the earth”. Overjoyed by the European tariff TACO moment, investors haven’t even flinched at the latest developments.

The above chart shows the price of gold against the CBOE Market Volatility Index (VIX) and the divergence is telling. While market sentiment does follow an anxiety/relief pattern on trade threats and remains subdued during threats of geopolitical aggression, gold is agnostic. In other words, the rise in the price of gold has continued regardless of the threat. Similar to how we view the bond market as the sober indicator of economic reality, for good or bad, compared to the stock market, where exuberance can run wild, gold might be providing us with a rational signal on risks that could ultimately cause more than just a kneejerk reaction in equities.

And it’s not just whether or not stocks fall in a more sustainable manner following a military event compared to the above-mentioned trade induced volatility. Historically, there have been a number of incidents where stocks experienced an initial sell-off which wasn’t protracted. Take 9/11 and the subsequent attack on Iraq. Equities rebounded after temporary setbacks, even the events created a significant amount of uncertainty. The Vietnam War era was different, of course, as the war in the late 60s and early 70s also led to higher inflation and increased government deficits. A stagflation bear market for stocks unfolded.

The danger of the TACO framework is complacency. It seems to work for money (trade), but does it work for war? And if markets do not respond negatively to an escalation in rhetoric, does this increase the odds of the administration executing military action? The military conflict may not have a direct long-lasting negative impact on equities, but it’s the second order effects on economic activity, government fiscal imbalances and inflation that can feed back into company fundamentals and stock market sentiment.

Heading into 2026, we told clients that while it is impossible to predict whether stocks will end the year up or down, one thing was clear. Whatever volatility we faced in 2025 may look small in comparison. Where we invest and what we invest in will be even more critical decisions in the months ahead in our opinion.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.     

Andrew Pyle