Recently, someone asked me why the U.S. stock market has been falling so sharply. Honestly, this market move is worth a thorough discussion.

Let's start with the current situation. The geopolitical conflict in the Middle East has escalated, with the U.S. and Israel's military actions against Iran triggering a chain reaction. The transportation of oil through the Strait of Hormuz has been directly blocked, affecting nearly 20-25% of global shipping routes and almost paralyzing them. Brent crude oil prices have soared, directly pushing up global energy costs, and the risk of supply chain disruptions has suddenly emerged. The market has entered what is called a "war pricing" mode, where any ceasefire news or escalation of conflict causes intense volatility. The Dow Jones and Nasdaq have been correcting from their February highs, with cumulative declines approaching 10%.

Why is this decline so severe? I see several overlapping factors. One is the concern over stagflation caused by soaring oil prices. High oil prices not only increase corporate costs—hit hardest by transportation and manufacturing—but more importantly, they elevate inflation expectations. Investors are beginning to worry that the economy might fall into the worst scenario—both inflation and recession—leading to a double squeeze on corporate profits.

Adding to this is the shift in the Federal Reserve's stance. At the March FOMC meeting, they decided to keep interest rates unchanged at 3.5% to 3.75%, but the dot plot indicated that by 2026, there might only be one rate cut or none at all, completely breaking previous market expectations of continuous rate cuts. Chairman Powell's language also became more cautious, emphasizing that if inflation gets out of control, the Fed might even restart rate hikes. This policy uncertainty itself puts pressure on valuation reappraisals.

Another critical factor is profit-taking in AI stocks. Before this decline, AI-related tech stocks were already valued at historic highs, with some tech giants' P/E ratios significantly above their historical averages. The market has started to doubt the sustainability of AI capital expenditure, and after continuous gains, investors' profit-taking mentality is strong. When geopolitical tensions trigger risk aversion, funds quickly withdraw from overvalued sectors. This explains why tech stocks have experienced a relatively larger correction.

Regarding the impact of the U.S. stock decline on Taiwan stocks, I must say the relationship is indeed very close. First, there's the direct contagion of market sentiment. When U.S. stocks plunge, panic spreads among global investors, and Taiwan stocks, as risk assets, are also sold off. Second, there is the pressure from foreign capital outflows. Foreign investors are major players in Taiwan's market; during U.S. volatility, they often withdraw funds from emerging markets, putting selling pressure on Taiwan stocks. The most fundamental link is the real economy. The U.S. is Taiwan’s largest export market; an economic recession in the U.S. directly means decreased demand for Taiwanese tech and manufacturing products, leading to lower corporate earnings expectations, which are ultimately reflected in stock prices. The recent sharp drop in Nasdaq also directly impacted heavyweight stocks like TSMC and MediaTek, causing Taiwan’s market to fall hundreds of points in early February and again at the end of March.

From an asset allocation perspective, a significant U.S. stock market decline usually triggers a typical risk-averse pattern. Funds tend to flow out of stocks and cryptocurrencies into safe assets like U.S. Treasuries, the U.S. dollar, and gold. U.S. Treasuries are especially popular; long-term bonds are seen as top global safe havens, and large capital inflows push bond prices higher and yields lower. The dollar, as the ultimate safe-haven currency, sees its exchange rate rise as investors sell risk assets to buy dollars. Gold also benefits from risk aversion, but if the market also expects the Fed to cut rates, that becomes a double positive for gold. However, in extreme panic moments, investors might sell gold to raise cash, causing short-term volatility.

Commodities generally tend to fall along with stocks because economic slowdown implies reduced demand. But this time, due to geopolitical conflicts causing energy supply disruptions, oil prices might rise against the trend, creating stagflation. Cryptocurrencies behave more like tech stocks; during sharp declines, they are often sold off to raise cash.

What should retail investors do? I suggest a few strategies. First, increase defensive assets in your portfolio—lock in stable income with quality corporate or government bonds, or allocate inflation-linked assets to hedge against energy volatility. Second, pay attention to the weighting of tech stocks; if AI stocks are overvalued and interest rates are uncertain, their volatility could be higher. Consider shifting some funds toward defensive sectors like utilities and healthcare. Third, hedge risks using CFDs, options, or inverse ETFs to prepare for extreme declines. Fourth, keep cash on hand; when the market direction is unclear, holding cash allows us to buy cheap shares after a correction.

Looking at history, from the Great Depression in 1929 to the 2008 financial crisis and recent geopolitical conflicts, every major U.S. stock market plunge has been driven by a combination of asset bubbles, shifts in monetary policy, and external shocks. These events repeatedly remind us that risk management is just as important as pursuing returns. Instead of trying to precisely predict the bottom amid volatility, it’s better to focus on fundamentals—assess your risk tolerance and whether your asset allocation is balanced. Increasing defensive assets appropriately, diversifying away from concentrated tech holdings, utilizing hedging tools, and maintaining cash reserves are relatively prudent approaches that can help us weather extreme market turbulence.