Wall Street has built another way to measure when financial-market pressure could influence President Donald Trump’s policy decisions. Right now, JPMorgan’s new “TACO” barometer suggests conditions are approaching levels that have preceded major policy shifts before.
The timing matters because the U.S. and Iran are again exchanging proposals aimed at reducing tensions, potentially reopening the Strait of Hormuz and bringing some relief to global energy markets.
JPMorgan Turns the TACO Trade Into an Index
“TACO” stands for “Trump Always Chickens Out,” a phrase Wall Street traders have used to describe occasions when Trump initially takes an aggressive position before later softening it.
JPMorgan has now tried to quantify that pattern. Its barometer tracks three variables that could create political or financial pressure on the administration:
- Trump’s approval rating
- The S&P 500
- The 10-year Treasury yield
Rather than looking at the raw numbers, JPMorgan compares each measure with its historical range using statistical Z-scores. The idea is straightforward: the further these indicators move into uncomfortable territory simultaneously, the greater the pressure for a policy adjustment.
JPMorgan says previous stress points in the gauge have lined up with notable shifts in Trump’s posture, including his comments that the bond market was getting “yippy” and an earlier pause in fighting with Iran.
The Bond Market May Be the Most Important Signal
The clever part of JPMorgan’s model is that it does not directly include oil.
Instead, oil prices can work their way through all three components. Higher energy prices can hurt consumer sentiment and presidential approval ratings, pressure corporate margins and stock valuations, and increase inflation expectations that push Treasury yields higher.
That chain has become especially important during the Iran conflict.
The 10-year Treasury yield recently climbed above 5.2%, reaching levels not seen in roughly 24 years, while elevated oil prices have added another source of inflation risk. The S&P 500 has also come under pressure as investors digest higher borrowing costs and geopolitical uncertainty.
For markets, that creates a potentially powerful feedback loop: geopolitical escalation pushes energy prices higher, higher energy prices increase inflation concerns, inflation keeps bond yields elevated, and higher yields put pressure on stocks.
Eventually, the financial cost of escalation can become politically significant.
Iran Talks Are Moving Again
That makes the latest diplomatic developments particularly noteworthy.
Iran said Wednesday that it had received an official U.S. response to Tehran’s recent proposal involving a ceasefire and reopening the Strait of Hormuz. The details of Washington’s response have not been publicly disclosed, and significant disagreements remain between the two countries.
Reuters reported that the response was transmitted through Qatari mediators and that the sequencing of concessions remains a major sticking point. Tehran has sought sanctions relief and other concessions while Washington has continued pressing Iran on its nuclear program and security issues.
Trump had publicly rejected Iran’s earlier proposal, but indirect negotiations continued afterward. That means the latest exchange does not guarantee an agreement, though it confirms that diplomacy remains active.
Investors Are Really Trading the Pressure Valve
The investment significance of the TACO index has less to do with predicting Trump’s personality and more to do with identifying the point where markets begin placing constraints on policy.
Three areas deserve particular attention.
Treasury Yields
A sustained move higher in the 10-year yield would tighten financial conditions across the economy, affecting mortgages, corporate borrowing, commercial real estate and equity valuations.
If geopolitical de-escalation lowers oil prices and inflation expectations, bonds could be among the first markets to react.
Oil
The Strait of Hormuz remains one of the most important variables for global energy prices.
Any credible agreement improving shipping conditions could remove part of the geopolitical risk premium currently embedded in crude. Conversely, a breakdown in negotiations could quickly restore that premium.
Stocks
For equities, the combination of lower oil prices and lower Treasury yields would generally reduce two major pressures on valuations.
Technology and other long-duration growth stocks are especially sensitive to changes in interest rates, while transportation, consumer and industrial businesses could benefit from lower energy costs.
Energy producers face the opposite equation. A meaningful geopolitical de-escalation could put downward pressure on crude prices and some oil-related equities.
The TACO Trade Could Eventually Stop Working
There is an important weakness in the strategy.
Once investors become convinced that every escalation will eventually be followed by a retreat, markets may begin pricing in the retreat before it happens.
That can reduce the financial pressure that previously encouraged compromise.
There is also no guarantee that historical patterns will repeat. Foreign policy, wars and negotiations involve variables that cannot be captured by three market indicators, and JPMorgan’s barometer should be viewed as a framework rather than a forecasting machine.
That may be the most useful way for investors to think about it.
The TACO index is essentially measuring how much financial pain markets are generating and whether that pain is becoming large enough to coincide with a change in policy.
The Investor Takeaway
Wall Street’s new TACO index sounds like another catchy trading acronym, but the underlying idea is more useful than the name.
Markets can eventually impose costs on policy.
With Treasury yields historically high, oil still carrying a geopolitical premium and U.S.-Iran negotiations active, JPMorgan’s barometer suggests those costs are worth watching closely.
For investors, the clearest signal will come from the combination of oil, Treasury yields and stocks. If those markets begin moving decisively toward lower geopolitical risk, Wall Street may conclude that another policy pivot is taking shape before Washington or Tehran says so publicly.
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