How the TACO trade could end up backfiring on investors

Investors have been playing a risky game with Trump’s trade policies, treating them as mere bluffs that the president will eventually back down from. However, the question now arises: what happens if Trump doesn’t back down, and his trade war escalates?

Ben Inker, the co-head of asset allocation at GMO, warns that investors may be underestimating the potential consequences of Trump’s aggressive trade tactics. Inker believes that the lack of a strong reaction from financial markets to Trump’s threats could embolden the president to push forward with his trade agenda.

Throughout the year, financial markets have served as a check on Trump’s trade policies. In April, after significant sell-offs in both stocks and bonds, Trump paused tariffs and backed away from controversial ideas like firing Jerome Powell as Fed chief. However, with investors becoming less reactive to Trump’s bold proposals, the president has recently ramped up the trade war once again.

This week, Trump issued threats of 25% tariffs on Japan and South Korea, 50% tariffs on Brazil, and 35% tariffs on Canada. Despite these escalations, the reaction from the stock market has been relatively muted compared to previous sell-offs. Inker noted that Trump’s aggressive stance, particularly the announcement of 50% tariffs on Brazil, indicates a shift in strategy where Trump may not back down without significant pressure from financial markets.

Investors, on the other hand, seem to be ignoring the downside risks. The S&P 500 and Nasdaq hit all-time highs recently, with valuations reaching historic levels. Inker estimates that the benchmark index is overvalued by as much as 40%.

Inker recommends looking for opportunities in deep value stocks and developed-market stocks outside of the US, as these areas may provide better returns in the current volatile market environment.

Overall, the market is at a critical juncture where Trump’s trade policies could have significant ramifications. Investors need to be cautious and prepared for potential volatility in the coming months. To read more about this topic, visit Business Insider for the original article.