Recently, I’ve noticed a pretty interesting phenomenon: whenever the global markets experience a big wave of volatility, everyone starts discussing the reasons behind the sharp drop in the U.S. stock market. To be honest, the direction of the U.S. stock market affects not only American investors, but also Taiwanese investors—it's truly a case of one thing triggering everything else.

I think the correction that began in March is worth breaking down in detail. The escalation of the Middle East geopolitical conflict directly impacted global energy supply. Disruptions to shipping through the Strait of Hormuz pushed oil prices higher, and Brent crude oil prices kept climbing. You see, expectations of supply-chain disruptions get reflected in the stock market almost immediately—both the Dow Jones and the Nasdaq entered technical corrections, with their declines approaching 10% from the February highs.

But when it comes to the reasons behind the U.S. stock market’s selloff, just looking at geopolitical risk isn’t enough. Higher oil prices raise corporate costs, inflation expectations rise as well, and the market begins to worry about the emergence of “stagflation.” Meanwhile, the Federal Reserve kept interest rates unchanged at the March FOMC meeting, but the dot plot showed that the number of rate cuts expected in 2026 was significantly reduced—possibly only one cut, or potentially none at all. Chairman Powell’s remarks were also rather cautious, suggesting that if inflation gets out of control, rate hikes could be restarted. This shattered the market’s earlier optimism about continued rate cuts, and the pressure of rising borrowing costs followed.

Another factor that can’t be overlooked is the valuation adjustment in the AI sector. Before this downturn, the price-to-earnings (P/E) ratios of tech giants had already been clearly above historical averages, and the market began to question the sustainability of AI capital expenditures. Combined with a strong atmosphere of taking profits after consecutive rallies, the geopolitical conflict triggered risk-aversion sentiment, causing capital to quickly withdraw from overvalued tech stocks and leaving the overall market facing correction pressure.

That said, this also reminds me of several major fluctuations in the U.S. stock market throughout history. During the 1929 Great Depression, the burst of the leverage bubble combined with the trade war, and the Dow Jones plummeted 89% in 33 months—this lesson still leaves a lingering sense of dread even today. The “Black Monday” of 1987, when algorithmic trading triggered a chain of selling pressure, led to a single-day crash of 22.6%, which is a classic example of a liquidity crisis. When the internet bubble burst in 2000, the Nasdaq crashed from 5133 points to 1108 points, a drop of as much as 78%. The 2008 subprime mortgage crisis, in particular, sparked a global financial storm— the Dow Jones fell from 14279 points to 6800 points.

These historical lessons tell us that the reasons behind a major decline in the U.S. stock market are often the compounded effects of asset price bubbles, shifts in monetary policy, and external shocks.

So what should Taiwanese investors do? The impact of a drop in the U.S. stock market on Taiwan stocks is multi-layered. First, there’s the contagion of market sentiment. When global investors panic and sell risk assets, Taiwan stocks also come under pressure. Second, foreign investors pulling back is also crucial—when the U.S. stock market is volatile, international investors often withdraw capital from emerging markets. The most fundamental impact comes from real-economy linkage: the U.S. is Taiwan’s largest export market, so a U.S. economic recession directly reduces demand for Taiwanese products, hitting the technology and manufacturing sectors first and foremost. This time, the Nasdaq’s sharp decline directly impacted heavyweight stocks such as TSMC and MediaTek. In February and March, Taiwan stocks fell by several hundred points in part due to this.

When the U.S. stock market falls sharply, the market typically enters a typical “risk-off mode.” Funds move out of stocks into low-risk assets such as U.S. Treasuries, the U.S. dollar, and gold. Bond prices rise and yields fall. The U.S. dollar appreciates as global investors scramble to buy safe-haven currencies. Gold sees increased demand as a traditional safe-haven asset—unless extreme panic forces investors to sell to meet margin calls. As for cryptocurrencies and commodities, they usually fall along with the stock market, unless the decline is caused by supply disruptions—in which case oil prices may rise against the trend.

Given this situation, retail investors can consider several response directions. First, increase the allocation to defensive assets in your investment portfolio, locking in stable interest by buying high-quality corporate bonds or government bonds. Second, pay attention to the weighting of technology stocks. If valuations are too high, diversify risk into defensive sectors such as utilities and healthcare. Third, be prepared with risk hedging— you can use CFD or inverse-type ETFs to deal with the potential for extreme declines. Fourth, keep a portion of your holdings in cash. When the market direction is unclear, hold onto your ammunition and wait to enter after the market has sold off excessively.

Looking back at years of market volatility, my takeaway is that the importance of risk management is absolutely no less than the pursuit of returns. Rather than trying to predict the bottom with precision or chasing gains while selling out and cutting losses, it’s better to examine whether your risk tolerance and asset allocation are balanced. Modestly increasing defensive assets, diversifying away from concentrated exposure to technology stocks, using hedging tools well, and keeping some cash positions—these relatively steadier approaches often help us get through difficult times in periods of extreme volatility.