Recently, I’ve noticed a pretty interesting phenomenon—why are U.S. stocks dropping so sharply? Watching the Taiwan stock market also fluctuate, many people are asking what’s really going on.

Honestly, the logic behind this market move isn’t that complicated. The escalation of conflicts in the Middle East directly blocks 20-25% of global oil transportation routes, causing oil prices to surge and energy costs to skyrocket, squeezing corporate profits and raising inflation expectations. Plus, the Federal Reserve’s stance has shifted to caution; the March FOMC meeting hinted that rate cuts might be significantly reduced, or even that rate hikes could resume if inflation gets out of control, directly shattering the market’s previous dream of continuous rate cuts.

What’s even more painful is that those AI-related tech stocks have already reached historic highs, with price-to-earnings ratios far above the historical average. When risk aversion rises, funds immediately withdraw from these overvalued sectors, leading to a particularly sharp decline in the Nasdaq. The Dow Jones and S&P 500 have also entered technical correction territory, falling about 10% from their February highs.

I looked into history and found that the question of why U.S. stocks fall has quite a few classic cases. During the Great Depression in 1929, the Dow plunged 89%. On Black Monday in 1987, it dropped 22.6% in a single day. The Nasdaq fell 78% during the dot-com bubble burst in 2000. The Dow declined 52% during the 2008 subprime mortgage crisis. In 2020, multiple circuit breakers were triggered during the pandemic shock… Each time, the underlying logic was similar—asset bubbles inflate to the extreme, then are burst by some triggering event.

This still has a pretty direct impact on the Taiwan stock market. A sharp decline in U.S. stocks can affect Taiwan through three channels: first, market sentiment contagion—global investors panic and sell simultaneously; second, foreign capital withdrawal—since Taiwan relies heavily on foreign investment, their exit creates selling pressure; third, economic linkage—U.S. recession directly reduces demand for Taiwan’s exports, especially impacting tech and manufacturing sectors. TSMC, MediaTek, and other large-cap stocks tend to follow Nasdaq’s swings, which is a good example.

Interestingly, when U.S. stocks fall, other assets tend to show clear safe-haven patterns. Bond prices rise, yields fall, the US dollar appreciates as the ultimate safe-haven currency, and gold is also bought. But if the decline is caused by geopolitical disruptions affecting supply, oil prices might actually rise counter to the trend, creating stagflation. Cryptocurrencies tend to behave more like tech stocks in these situations, usually falling along with U.S. stocks.

How should retail investors respond to this volatility? My view is that instead of trying to precisely predict bottoms or chasing highs and lows, it’s better to focus on fundamentals. Check whether your risk tolerance and asset allocation are truly balanced, and consider increasing defensive assets at reasonable levels—such as high-quality corporate bonds or government bonds—to lock in stable interest income. Also, pay attention to the weighting of tech stocks; if AI-related stocks are overvalued, consider diversifying risk into defensive sectors like utilities or healthcare.

Additionally, managing risk hedging is very important. You might consider using inverse ETFs or other hedging tools to cope with extreme declines. Finally, keep some cash on hand—waiting for the market to oversell before picking up bargains is often the best move. In short, risk management is just as crucial as pursuing returns; it’s a relatively stable approach in extremely volatile markets.