Recently, I noticed that the U.S. stock market has experienced significant volatility again, and this decline is indeed worth paying attention to. The Dow Jones and Nasdaq have both entered a technical correction zone, with a cumulative drop of about 10% from their February highs, and market risk aversion has clearly increased. I’ve summarized an analysis of the reasons behind this recent U.S. stock decline, which should help everyone understand the current situation.

First is the escalation of Middle East geopolitical conflicts. The U.S. and Israel launched airstrikes on Iran’s energy facilities, directly impacting 20-25% of global oil shipping routes, with severe disruptions in the Strait of Hormuz. Brent crude oil prices soared, pushing up global energy costs, increasing the risk of supply chain disruptions, and raising inflation expectations. The market is now essentially in a “war pricing” mode, where any news of ceasefire progress or escalation of conflict can trigger intense volatility.

Second is concerns about stagflation caused by soaring oil prices. High oil prices not only increase costs for businesses, especially in transportation and manufacturing, but also elevate inflation expectations. Investors are beginning to worry about a worst-case scenario of “stagflation,” which often compresses corporate profits and suppresses consumption, putting monetary policy in a dilemma. Therefore, you see utilities and essential consumer goods relatively resistant to declines, while technology and growth stocks face greater pressure.

The Federal Reserve’s monetary policy also remains uncertain. The March FOMC meeting kept interest rates steady at 3.5%-3.75%, with the dot plot showing a significant reduction in the number of rate cuts expected in 2026, possibly only one cut or none at all, while inflation expectations were also revised upward. Chairman Powell’s tone is cautious, emphasizing that if inflation spirals out of control due to energy prices, the Fed may resume rate hikes. This directly breaks the market’s previous optimistic expectations of continued rate cuts, leading to higher borrowing costs and valuation re-evaluations.

Another key factor is profit-taking in AI-related tech stocks. Before this decline, AI concept stocks were already valued at historic highs, with some tech giants’ P/E ratios significantly above their historical averages. Concerns about the sustainability of AI capital expenditure and commercialization progress have gradually emerged. Coupled with previous continuous gains, investor profit-taking sentiment was strong. After geopolitical conflicts triggered risk aversion, momentum to go long diminished, and funds quickly withdrew from high-valuation AI sectors, causing a substantial correction in tech stocks.

Looking back at history, I find that major declines in the U.S. stock market often share some common points. During the Great Depression in 1929, a leverage bubble burst combined with trade wars triggered a global economic collapse. Black Monday in 1987 was caused by algorithmic trading triggering chain selling, with the Dow plunging 22.6% in a single day. During the dot-com bubble burst from 2000 to 2002, the Nasdaq fell from 5,133 to 1,108 points, a 78% decline. The subprime mortgage crisis from 2007 to 2009 was caused by the spread of the housing bubble and financial derivatives risks. In 2020, during the COVID-19 pandemic, the U.S. stock market experienced multiple circuit breakers, with the Dow dropping over 30% in a short period. In the 2022 bear market driven by rate hikes, the Fed aggressively raised rates seven times, with the S&P 500 falling 27% and Nasdaq dropping 35%.

From these historical events, I observe that before many major U.S. stock market crashes, there were often severe asset price bubbles, with valuations far detached from economic fundamentals. When these bubbles inflate to their limits, policy shifts or external shocks become the final straw that breaks the market.

The impact of a U.S. stock market decline on Taiwan stocks is still quite direct. Historical data shows a high correlation between the two. The most immediate impact is the transmission of market sentiment; a sharp decline in U.S. stocks immediately triggers panic among global investors, leading to simultaneous sell-offs in Taiwan stocks and other risk assets. Foreign capital withdrawals are also a key channel, as international investors pull funds from emerging markets including Taiwan. The most fundamental effect is through the real economy: the U.S. is Taiwan’s most important export market, and an economic recession in the U.S. would directly reduce demand for Taiwanese exports, especially in tech and manufacturing sectors. Expectations for corporate profits would decline, ultimately reflected in falling stock prices. Both in early February and at the end of March, Taiwan stocks also experienced declines of several hundred points due to U.S. stock weakness.

Major U.S. stock declines often trigger typical risk-off modes, with funds flowing from equities and cryptocurrencies into safer assets like U.S. Treasuries, the U.S. dollar, and gold. In bonds, during stock market crashes, investors tend to shift into safer assets; U.S. government bonds, especially long-term bonds, are considered top safe-haven assets globally, leading to increased bond prices and falling yields. The U.S. dollar is also the ultimate safe-haven currency during global panic, with investors selling riskier assets to buy dollars, causing the dollar to appreciate. Gold, as a traditional safe-haven asset, tends to be bought during stock crashes to hedge against uncertainty. However, in extreme panic moments, investors sometimes sell gold for cash to meet margin calls. In commodities, stock market declines usually signal slowing economic growth, reducing demand for industrial raw materials like oil and copper, which typically leads to falling oil and copper prices along with stocks. Cryptocurrencies behave more like high-risk assets such as tech stocks; during U.S. stock crashes, investors often sell cryptocurrencies for cash.

How should retail investors respond? My suggestions are several aspects. First, increase defensive asset allocations in your portfolio, locking in quality corporate or government bonds at appropriate levels to earn stable interest, or moderately allocate inflation-linked assets to hedge geopolitical-driven energy price volatility. Second, pay attention to the weighting of tech stocks; if current AI-related tech stocks are overvalued, they may experience significant volatility amid uncertain interest rate paths. Diversify risk into defensive sectors like utilities and healthcare. Proper risk hedging is also important, using options or inverse ETFs to prepare for potential extreme declines. Lastly, keep some cash on hand; when market direction is unclear, cash allows us to buy cheaper assets after sharp declines.

Ultimately, each U.S. stock market crash has its unique triggers, but behind them are often the combined effects of asset bubbles, monetary policy shifts, and external shocks. From the Great Depression in 1929 to recent energy crises triggered by geopolitical conflicts, every market upheaval reminds investors that risk management is just as important as seeking returns. In facing market volatility, instead of trying to precisely predict bottoms or chase highs, it’s better to return to fundamentals, review your risk tolerance and asset allocation balance. Moderately increasing defensive assets, diversifying tech concentration, utilizing hedging tools, and maintaining cash positions are relatively prudent strategies during extreme volatility.