Financial markets have recently embraced an investment strategy known as the TACO trade, an acronym standing for Trump Always Chickens Out. Investors utilizing this approach typically buy into equities during policy-driven market dips, operating on the assumption that United States President Donald Trump will eventually backtrack on aggressive policies when faced with severe market pressure. The escalating conflict in Iran, however, threatens to present this established strategy with its first insurmountable challenge.
The military strikes launched by the United States and Israel against Iran on February 28 have significantly widened the scope of war in the Middle East. This conflict has already triggered the most severe energy market shock since the 1970s and caused extreme volatility in oil and gas prices. The United States stock market has remained relatively calm despite these developments. European, Asian, and emerging market equities have broadly declined between 4% and 7% since the hostilities began, yet the S&P 500 index has slipped only about 1%, while the Nasdaq has actually managed a slight gain of roughly 0.5%. This resilient market performance suggests that many investors still operate under the assumption that the president will ultimately choose conciliation if circumstances demand it.
The current crisis may prove too complex for the TACO strategy to navigate successfully. The destruction wrought by the conflict cannot be swiftly repaired even if the administration announces an immediate end to the war tomorrow. The suspension of oil and gas production, the shuttering of refining facilities, the damage to critical infrastructure, and the severe disruption of global energy supply chains are issues that cannot be resolved through a simple policy document or a social media post. Market analysts estimate that returning to pre-war operational conditions will likely require months or possibly years of sustained effort.
Shipping costs and maritime insurance premiums in the Middle East have also surged dramatically. These related expenses will struggle to return to normal levels in the short term even if the fighting ceases. Eswar Prasad, an economics professor at Cornell University, notes that while global financial markets have historically managed to digest the uncertainty generated by administration policies, the economic and geopolitical ramifications of the Iran conflict are likely to be far more profound and enduring.
This conflict marks the first time in history that the Strait of Hormuz has effectively fallen under a state of blockade. This vital maritime chokepoint handles approximately 20% of total global energy transportation. The Middle East has endured numerous conflicts in the past, including the Iran-Iraq War in the 1980s, the Gulf War in the early 1990s, and the Iraq War in the 2000s, yet none of these events resulted in a near-total standstill of oil tanker traffic.
The Middle East could remain in a state of prolonged instability even under the most optimistic market scenario where the United States swiftly concludes its military operations. These volatile variables fall entirely outside the direct control of the administration. Markets face immense difficulty in predicting either the duration of the conflict or the ultimate scope of its global impact.
The policy approach of the current administration during its second term is frequently characterized by adopting a hardline stance before carefully observing the subsequent market reaction. The president tends to push forward with his agenda if financial markets show little volatility, but he often chooses to step back if equities experience a significant downturn. He has repeatedly challenged the established international order and traditional diplomatic norms since returning to the White House fourteen months ago. These actions include weakening the eight-decade alliance between the United States and Europe, destabilizing the NATO framework, proposing the annexation of Greenland and Canada, pushing for regime change in Venezuela, and threatening to replace Federal Reserve Chair Jerome Powell.
Each of these events initially sparked market volatility before the administration eventually adjusted its stance, allowing markets to gradually solidify the logic behind the TACO trade. The most prominent example occurred during the Liberation Day Tariffs policy implementation last April. The United States stock market lost trillions of dollars in value within a matter of days, prompting the administration to ultimately withdraw some of the most severe tariff measures.
The war in the Middle East presents a fundamentally different scenario with considerably higher structural risks. The oil crisis spanning 1973 to 1974 serves as a potent historical parallel. Oil prices quadrupled in a remarkably short period during that era, and while the underlying petroleum embargo lasted only about six months, the resulting inflationary pressure plagued the United States and other industrial nations for more than a decade.
A similar fourfold price explosion is unlikely today because the United States now stands as the largest energy producer and exporter in the world. Sustained high energy prices combined with battered global supply chains could still reignite the severe risk of stagflation. Investors must now consider whether this crisis has escalated beyond the point of simple policy reversal, recognizing that markets and the broader economy will likely suffer long-term consequences even if the administration eventually chooses to retreat.