Recently, someone asked me what a sharp drop in U.S. stocks means for investors, so I decided to organize my thoughts on the topic.

Speaking of U.S. stocks, the volatility has indeed been quite significant in recent years. Looking back, from geopolitical conflicts to shifts in monetary policy, and then to Trump’s tariff policies, the U.S. stock market has faced no small number of shocks. The adjustment in the first half of the year left the deepest impression: the Dow Jones fell more than 2000 points in a single day, and the S&P 500 also plunged sharply—an unusual situation in recent times.

I’ve outlined several major reasons for this U.S. market slump. First is the geopolitical situation. The Middle East conflict has disrupted shipping through the Strait of Hormuz, greatly increasing the risk of oil supply, and the surge in oil prices directly pushed up global energy costs. Second, inflation expectations have been heating up. High oil prices, combined with concerns about supply chains, have led the market to worry about the emergence of stagflation. In addition, the Federal Reserve’s policy signals have broken expectations of easing: interest rates are staying at a high level, and expectations for rate cuts have been revised significantly downward. Finally, there’s the valuation issue in AI stocks. Tech giants’ price-to-earnings ratios are already far above the historical average, which creates strong pressure for investors to lock in profits.

Historically, big drops in U.S. stocks are not rare. During the Great Depression in 1929, the Dow crashed by 89%; during Black Monday in 1987, it fell 22.6% in a single day; when the dot-com bubble burst in 2000, the Nasdaq dropped 78%; during the 2008 subprime crisis, it fell 52%; in 2020, the COVID-19 pandemic shock caused a decline of more than 30%; and last year’s rate-hike-induced bear market saw the S&P 500 fall 27%. Each time behind it lies a similar logic: asset bubbles inflate to the extreme, and a policy shift or external shock becomes the final straw that breaks the camel’s back.

For Taiwanese investors, the impact of a U.S. stock market drop is quite significant. The linkage between the Taiwan stock market and U.S. stocks is very high, mainly transmitted through three channels. The most direct is market sentiment: when U.S. stocks plunge, global panic is triggered immediately, and investors sell Taiwan stocks and other risk assets in tandem. Second is foreign fund withdrawal. When U.S. stocks become volatile, international investors tend to pull capital out of emerging markets, putting pressure on Taiwan’s market as well. The most fundamental driver is the linkage with the real economy. The United States is Taiwan’s largest export market, so an American economic recession directly hits orders for Taiwan’s technology and manufacturing industries; declining corporate earnings ultimately show up in stock prices. This time, the sharp drop in U.S. stocks has dealt a serious blow to heavyweights like TSMC and MediaTek.

When U.S. stocks fall sharply, it usually triggers a “risk-off mode,” with capital moving from high-risk assets such as stocks and crypto into safe-haven assets like U.S. Treasuries, the U.S. dollar, and gold. U.S. government bonds—especially long-term bonds—are seen as the safest assets globally. When the stock market declines, large amounts of funds rush into the bond market, pushing bond prices up and driving yields down. The U.S. dollar also tends to appreciate because global investors sell emerging market assets and convert back into dollars. Gold, as a traditional safe-haven tool, is typically bought during stock market crashes, which pushes up gold prices. However, if the decline comes along with a rate-hike cycle, higher interest rates can suppress gold’s appeal. Commodities such as oil and copper usually move down with the stock market because an economic downturn reduces demand; but if the drop is caused by geopolitical supply interruptions, oil prices may actually rise. Although some people say cryptocurrencies are “digital gold,” their real behavior is closer to that of tech stocks—in stock market crashes, investors often sell crypto to raise cash.

When facing a situation like a sharp drop in U.S. stocks, how should retail investors respond? I think several directions are worth considering. First, increase defensive assets in your portfolio—for example, high-quality corporate bonds or government bonds to lock in stable interest income, or allocate inflation-linked assets to hedge energy volatility. Second, pay attention to the weighting of tech stocks. If AI-related stocks are priced too high, you can diversify risk moderately into defensive sectors such as utilities and healthcare. Third, prepare for risk hedging. You can use options or inverse-type ETFs to deal with extreme declines. Fourth, keep some cash reserves. When the market direction is unclear, having cash lets you buy cheaper after overselling.

In the end, although each U.S. stock market crash has a different trigger, the basics behind it are essentially the combined effect of three things: an asset bubble, a shift in monetary policy, and external shocks. From the Great Depression of 1929 to the recent geopolitical conflicts, markets keep reminding us that risk management is absolutely as important as chasing returns. Rather than trying to predict the bottom precisely or following the crowd to buy at the top and sell at the low, it’s better to return to fundamentals—review your risk tolerance and whether your asset allocation is balanced. Moderately increasing defensive assets, reducing concentration in tech stocks, making good use of hedging tools, and maintaining a cash position—these are the relatively more resilient approaches in the face of extreme volatility.