Taco Index at 0.6, Reflecting Pressure on Trump’s Policies

Donald Trump, the President of the United States, has been analyzed not as someone who acts on whimsical impulses but rather as someone who responds to market and public opinion pressures through a repetitive policy approach. It has been observed that after pressures increase on significant issues affecting the market and households, such as tariffs, the independence of the Federal Reserve, and Middle Eastern affairs, policy responses become more flexible.

On the 14th, the Daiwa Institute of Research announced that it created a 'Taco Index' by synthesizing the S&P 500 index, U.S. 10-year Treasury yield, dollar index, and approval ratings since President Trump took office. "Taco" is an acronym for the English expression "Trump Always Chickens Out," referring to the pattern where after announcing a tough policy, he softens his stance when market shocks or public backlash intensify.

The Daiwa Institute converted each variable into Z-scores and synthesized them at the same ratio. The index rises as stock prices fall, interest rates rise, the dollar weakens, and approval ratings decline. The institute explained that an increase in the index signifies growing dissatisfaction and stress among the market and voters, and instances have been observed where policy easing follows a peak in the index.

Z-scores are a statistical method that shows how far individual data points deviate from the mean based on standard deviation. They are used to combine different units of stock indices, interest rates, exchange rates, and approval ratings into a single indicator. The Taco Index from the Daiwa Institute is more focused on comparing the direction of policy pressures rather than predicting specific asset prices.

A representative example is tariffs. After President Trump announced a significant tariff increase on April 2, 2025, coinciding with "Liberation Day," concerns about the economy and prices grew, causing the Taco Index to rise to 0.6 by the end of the month. Subsequently, U.S. Treasury Secretary Scott Bessent hinted at the possibility of reducing high tariffs, and after U.S.-China negotiations in Geneva from May 10 to 12, tariffs on China were lowered, leading the index to reverse its upward trend.

By the end of June, the index had dropped to about 0.2, interpreted as a temporary easing of market and voter stress regarding the tariff shock. However, the decline in the index does not imply that the tariff conflict has been resolved; rather, it suggests that the pressure has decreased as some tough measures were adjusted.

At the beginning of July, when new tariff rates for reciprocal tariffs were announced, the index rose again to about 0.4. However, as the tariff rates turned out to be lower than expected, and with a U.S.-China tariff agreement reached in Busan at the end of October, the index fluctuated in the negative range from November to mid-January of this year. This period was interpreted as one where both the market and voters felt less burdened by the Trump administration's policy operations.

The controversy over the independence of the Federal Reserve was also reflected in the index. As attacks on former Fed Chair Jerome Powell intensified and the renovation of the Fed headquarters became the subject of investigation, the index turned positive from the negative range to about 0.2 in January.

Subsequently, concerns arose within the Republican Party and the market, and when President Trump nominated Kevin Warsh as the next Fed Chair on January 30, the index reverted to negative by the end of February. This indicates that when political pressure surrounding central bank independence escalates into market anxiety, the level of policy response may be adjusted.

Since February of this year, Middle Eastern variables have been cited as key factors in the index's fluctuations. With the use of force against Iran, the crisis in the Strait of Hormuz, and rising energy prices overlapping, the index jumped to about 0.4 in the negative territory. It fell after a temporary ceasefire agreement in early April, but as negotiations stalled and concerns about the prolonged blockade of the Strait of Hormuz emerged, it rose to 0.6 by mid-May.

Middle Eastern tensions are variables that can simultaneously affect oil prices, inflation, and the sentiment of risk assets. Earlier, it was reported that President Trump presented economic collapse and military action as options regarding the Iran issue. At that time, it was also noted that the specific impact of Middle Eastern tensions on international oil prices and the cryptocurrency market needed further confirmation.

The Taco Index is not an investment judgment indicator. The Daiwa Institute explained that this index merely reflects external pressures from the market and voters and is not necessarily indicative of the internal political dynamics of the Trump administration. The index has been presented as a reference indicator that visualizes the cycle between tough policies and easing.

In the Korean market, tariffs, the independence of the Federal Reserve, and Middle Eastern affairs can influence the volatility of risk assets through exchange rates, interest rates, and oil prices. However, it is difficult to definitively conclude specific policy changes or asset price directions based solely on the Taco Index. The index presented by the institute is more of an analytical tool for retrospectively comparing when the policy pressures of the Trump administration increased.