Recently, I've seen many discussions about the volatility of the U.S. stock market, and I’ve also organized some thoughts. To be honest, the reasons for a sharp decline in the U.S. stock market are never due to a single factor; usually, multiple pressures stacking up together trigger the drop.

In this round of decline, I’ve noticed a few key points. First, the escalation of geopolitical tensions in the Middle East. The U.S. and Israel’s military actions against Iran directly impact 20-25% of global oil transportation routes, with the Strait of Hormuz shipping being blocked, causing oil prices to soar. High oil prices not only increase corporate costs but also heighten concerns about stagflation. Second, the Federal Reserve’s policy stance has shifted. The March FOMC meeting kept interest rates at 3.5%-3.75%, but the dot plot showed a significant reduction in rate cuts by 2026, possibly only one cut. Chairman Powell also emphasized that if inflation spirals out of control due to energy, rate hikes could resume. This uncertainty directly shattered the market’s previous expectations of continued easing.

Another easily overlooked point is AI valuation. Before this decline, the P/E ratios of tech giants were already far above historical averages, and investor profit-taking was intense. Once risk aversion heats up, capital quickly withdraws from overvalued tech stocks. So, the real reason for the sharp drop in the U.S. stock market is a perfect storm of these factors.

To understand the current market, I think it’s necessary to review history. During the Great Depression in 1929, the Dow Jones Industrial Average plummeted 89% over 33 months. At that time, a leverage bubble burst combined with trade wars, directly destroying the global economy. On Black Monday in 1987, algorithmic trading triggered chain selling, causing the Dow to plunge 22.6% in a single day. In 2000, the dot-com bubble burst, with the Nasdaq falling from 5,133 to 1,108, a 78% decline, taking 15 years to recover. During the 2007 subprime crisis, the Dow dropped from 14,279 to 6,800, sparking a global financial crisis. In 2020, pandemic shocks led to multiple circuit breakers in the U.S. markets. In 2022, to combat the highest inflation in 40 years, the Fed aggressively raised interest rates seven times, totaling 425 basis points, with the S&P 500 falling 27% and the Nasdaq dropping 35%.

A recent example is the Trump tariffs impact in April 2025. On April 2, it was announced that a 10% baseline tariff would be imposed on all trading partners, with higher tariffs on deficit countries. As a result, on April 4, the Dow plunged 2,231 points, a 5.50% drop, and the S&P 500 fell 5.97%. Over two days, the three major indices declined by more than 10%. The cause of this market plunge was policy exceeding expectations, directly overturning global trade rules.

Looking at these histories, I’ve found a pattern: before multiple major declines, the market often exhibited severe asset bubbles, with valuations far detached from economic fundamentals. When the bubble inflates to its limit, policy shifts or external shocks become the last straw that breaks the camel’s back.

What about the Taiwan stock market? Honestly, Taiwan stocks are highly correlated with the U.S. market. A sharp decline in U.S. stocks can impact Taiwan through three channels: contagion of market sentiment leading investors to sell off simultaneously, foreign capital withdrawal, and reduced demand for exports due to U.S. economic slowdown. The COVID-19 pandemic in 2020 and the situations in February and March this year proved this, with Taiwan stocks falling sharply along with U.S. markets.

Besides Taiwan stocks, gold, bonds, and the U.S. dollar will also fluctuate. Usually, a U.S. stock market crash triggers a risk-off mode, with funds flowing from equities into U.S. Treasuries, the dollar, and gold—low-risk assets. U.S. bond yields tend to fall, the dollar appreciates, and gold rises. But if the decline is driven by runaway inflation prompting rate hikes (like in 2022), both stocks and bonds might fall simultaneously. In commodities, oil and copper prices usually fall with stocks, but if the decline stems from geopolitical conflicts disrupting supply, oil prices might actually rise against the trend. Cryptocurrencies tend to behave more like tech stocks—usually falling sharply during U.S. market crashes.

How should retail investors respond? My advice is: increase defensive assets in your portfolio, such as high-quality corporate bonds or government bonds, or allocate inflation-linked assets to hedge energy volatility. Pay attention to the weighting of tech stocks; if AI-related stocks are overvalued, consider diversifying into defensive sectors like utilities and healthcare. Hedge risks properly by using options or inverse ETFs to prepare for extreme declines. Most importantly, keep some cash on hand; when market directions are unclear, this allows you to buy cheap after a sharp drop.

Ultimately, risk management is just as important as pursuing returns. Instead of trying to precisely predict bottoms or chasing highs, it’s better to review your risk tolerance and asset allocation. Moderately increase defensive assets, diversify concentration, make good use of hedging tools, and retain cash positions—these are relatively prudent approaches during extreme volatility.