The recent sharp decline in the U.S. stock market definitely warrants a thorough review. If you're also paying attention to the market, you should be able to feel how intense the volatility has been. Why did the U.S. stocks plunge? The underlying logic isn't that complicated, but the impact is far-reaching.

Let's start with the current situation. The escalation of the Middle East geopolitical conflict directly pushed up oil prices, and the disruption of shipping through the Strait of Hormuz created an expected gap in global energy supply. The surge in oil prices isn't just about rising energy costs; it also raises inflation expectations, squeezing corporate profit margins, and beginning to dampen consumer spending. This combination of "stagflation" hits tech stocks and growth stocks hardest because it simultaneously impacts earnings and valuations.

Adding to that is the change in the Federal Reserve's stance. The March FOMC meeting announced no change in interest rates, but the rate cut expectations were significantly lowered, and there’s even a possibility of resuming rate hikes. This shattered the market’s illusion of a loose monetary environment, as the expectation of higher borrowing costs immediately impacted valuations. AI-related tech stocks, which were already valued at historic highs, saw investors’ profit-taking momentum especially strong. Capital flowed out of high-valuation sectors, causing the entire tech sector to tumble.

Looking at history, we can see that major declines in the U.S. stock market often follow similar patterns. During the Great Depression in 1929, a leverage bubble burst combined with protectionist tariffs turned a local crisis into a global economic disaster. On Black Monday in 1987, algorithmic trading triggered a chain of selling that caused a 22.6% crash in a single day. The dot-com bubble burst in 2000, the subprime mortgage crisis in 2008, and the COVID-19 pandemic shock in 2020—all were bubbles inflated to the extreme, with a trigger event acting as the final straw that broke the camel’s back.

The 2022 bear market driven by rate hikes was also very typical. To combat the highest inflation in forty years, the Fed raised rates seven times in one year, totaling 425 basis points. The Russia-Ukraine war further pushed up energy and food prices, worsening inflation. Under this double impact, the market directly entered a bear phase, with the S&P 500 falling 27% and the Nasdaq dropping 35%.

Why did this latest wave of U.S. stocks fall so sharply? The announcement of Trump administration tariffs in April indeed exceeded expectations. The 10% baseline tariffs plus additional tariffs targeting trade deficit countries directly overturned current global trade rules. The market’s panic over supply chain disruptions was immediately reflected in stock prices, with the Dow plunging 5.5% in one day, and all three major indices losing over 10% in two days.

This decline also had a direct impact on Taiwan stocks. The sharp drop in U.S. stocks triggers panic among global investors, leading foreign capital to withdraw from emerging markets, which naturally drags down Taiwan stocks. More fundamentally, the U.S. is Taiwan’s most important export market. An economic recession in the U.S. would directly reduce demand for Taiwanese tech and manufacturing products, with declining corporate earnings expectations eventually reflected in stock prices. Heavyweights like TSMC and MediaTek suffered the deepest losses.

From an asset allocation perspective, a sharp decline in U.S. stocks usually triggers a typical risk-averse pattern. Capital flows out of high-risk assets like stocks and cryptocurrencies into safe-haven assets such as U.S. Treasuries, the dollar, and gold. U.S. government bonds, especially long-term bonds, are heavily bought, pushing bond prices higher and yields lower. Gold, as a traditional safe haven, also gains popularity—unless the market simultaneously expects the Fed to raise interest rates, in which case higher rates would reduce gold’s attractiveness.

For retail investors, coping with this kind of volatility isn’t actually complicated. First, increase defensive assets in your portfolio, such as high-quality corporate bonds or government bonds, to lock in stable returns. Second, pay attention to the weight of tech stocks. If AI-related stocks are overvalued, consider diversifying risk into defensive sectors like utilities and healthcare. Third, make good use of hedging tools like CFDs or inverse ETFs to protect against extreme declines. Lastly, keep a moderate cash reserve, as market oversold conditions can be good opportunities to buy the dip.

Reviewing these historical fluctuations, you’ll find a common point: risk management is absolutely as important as pursuing returns. Instead of trying to precisely predict bottoms or chasing highs and lows, it’s better to focus on fundamentals—review your risk tolerance and whether your asset allocation is truly balanced. Slightly increasing defensive assets and diversifying away from concentrated tech holdings can help you navigate extreme volatility more steadily.