MW Stocks are teetering on the edge of correction territory. Why the 'TACO trade' could flop.
By Isabel Wang
The 'TACO trade' that fueled previous quick rebounds could be torpedoed by an escalating Iran conflict
The trade, where investors expect President Trump to back down from an aggressive stance due to a market selloff, is looking suspect.
With U.S. stocks on the doorstep of correction territory, the once-reliable "TACO trade" -where President "Trump Always Chickens Out" when trouble hits markets - has been looking suspect.
Concerns about the escalating Iran war, the surge in oil prices (CL.1) (BRN00) and inflation in the world's largest economy, have dragged all three major indexes well below their recent highs. The S&P 500 SPX has fallen 6.8% from its peak in January, while the Dow Jones Industrial Average DJIA was down 9.2% and the Nasdaq Composite COMP has slumped 9.6% from their recent all-time closing highs, according to FactSet data.
That's left the tech-heavy Nasdaq and the Dow on the brink of entering correction territory, which is defined as a decline of at least 10% from a recent peak. After that, another 10% decline puts them in a bear market.
History suggests that's far from a sure thing. Pullbacks of around 5% for the S&P 500 index have been pretty common and typically have been good buying opportunities for investors. Since 1957, the S&P 500 has fallen 5% from an all-time high 60 times, with a median return of 2.2% the following month. Looking further out, the index logged a median gain of 6.7% over the next six months and 9.1% one year later, according to Dow Jones Market Data (see table below).
SOURCE: DOW JONES MARKET DATA
Yet the current backdrop raises questions about whether the historical pattern will hold. The White House sent mixed messages Friday about potentially "winding down" the conflict with Iran, while also sending more Marines and warships to the Middle East. There also has been Iran's historic blockade of the Strait of Hormuz and direct strikes on energy infrastructure across the Middle East, all of which could eviscerate any hope for a quick market rebound.
See: The world's largest natural-gas complex is now battered. Here's who will benefit.
A growing worry is that the conflict could cause more lasting damage to the stock market than prior episodes.
Investors may be waiting for a pivot, knowing how concerned Trump is with the stock market, said Debbie Hippensteel, senior investment portfolio manager at River Wealth Advisors. But the "deeper and the longer we go into this conflict, the harder it is to get out," she told MarketWatch via phone.
Will Trump try to pivot on Iran?
The term "TACO trade" arose on Wall Street following last April's "liberation day" selloff, when Trump announced sweeping additional tariffs on imports from most U.S. trading partners, only to delay many of them when investors panicked.
Since then, the trade has been an article of faith for many investors who approach initial selloffs sparked by Trump policies or military campaigns with skepticism. Instead of selling into a panic, they buy instead, anticipating he will soon back down or moderate his stance, sparking an equity rebound.
Trump often touts strong stock-market performance as proof of his political and policy success. That's has many in the market viewing equity and bond prices as a constraint on his policies, a logic that also underpins the "TACO trade."
Tony Rodriguez, head of fixed income strategy at Nuveen, said the prolonged high energy prices ahead of midterm elections raise the pressure for the Trump administration, increasing the likelihood of a U.S. pivot in the Iran war, or the White House "bowing to political realities."
See: This is when Trump will need an Iran-conflict offramp if oil prices aren't contained
Stocks might not rebound even if Trump backs down
While Trump might look to back down from his aggressive stance on Iran, a market recovery may not come easily this time.
Unlike prior circumstances, such as after "liberation day" when stocks staged a rapid recovery, the market may struggle to bounce back this time, especially if oil stays above $100 a barrel for some time.
"It was easier to reverse, or roll back, the tariff policies, but this time it's not going to be as straightforward with higher oil prices and higher gas prices," said Chris Maxey, chief market strategist at Wealthspire. "You could have longer-lasting damage this time around, which just means that the markets may take a moment longer to recover," he told MarketWatch.
In Maxey's view, a weaker labor market and increasing inflation concerns leave the market less supported than in 2025. "Even as we were going through the tariff policy announcement last year, there was still an expectation that the economy was going to grow," he said. But this time, he's less confident that anything can save the economy and the market.
"We just need resolution [to the war] and lower oil prices," Maxey said.
All three major indexes stock indexes on Friday closed with their fourth straight weekly losses. The Dow fell 2.1% last week, while the Nasdaq was off 2.1% and the S&P 500 tumbled 1.9%, according to FactSet data.
-Isabel Wang
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 22, 2026 12:00 ET (16:00 GMT)
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