Recently, many people have been discussing the big drop in the U.S. stock market. In fact, there are several underlying reasons worth understanding deeply. Instead of blindly following the trend, it's better to first clarify what exactly caused the stock market to plunge, so that you can develop reasonable response strategies.

Speaking of the volatility in the U.S. stock market, I’ve noticed an interesting phenomenon. The recent adjustment in early April was mainly driven by risk aversion triggered by escalating geopolitical conflicts. The U.S. and Israel’s military actions against Iran disrupted the global energy supply chain, with shipping through the Strait of Hormuz being blocked, causing oil prices to soar, which directly increased global costs. The rise in Brent crude oil prices is not just an energy issue; it also raises concerns about stagflation. This combination puts pressure on corporate profits and consumer spending.

Another key factor is the Federal Reserve’s changing stance. The March FOMC meeting announced maintaining interest rates at 3.5%-3.75%, but the dot plot showed a significant reduction in the number of rate cuts in 2026, possibly only one or none at all. Chairman Powell’s cautious language broke market expectations of continued rate cuts, and this shift in outlook indeed triggered valuation reassessment. Coupled with inflation data like PPI exceeding expectations, market doubts have deepened.

I also noticed that AI-related tech stocks were hit hardest during this decline. Previously, these stocks already had valuations at historic highs, with some tech giants’ P/E ratios far above historical averages. As risk aversion increased, these high-valuation assets were sold off first, with funds quickly flowing out of tech stocks.

Looking at the historical context of major stock market crashes, I reviewed several past significant events. During the Great Depression in 1929, the Dow Jones plummeted 89%, mainly due to leverage bubbles bursting and trade wars. On Black Monday in 1987, the market crashed 22.6% in a single day, triggered by algorithmic trading and chain selling. The dot-com bubble burst in 2000, with the Nasdaq dropping from 5,133 to 1,108 points, a 78% decline. The 2008 subprime mortgage crisis caused the Dow to fall from 14,279 to 6,800 points. In 2020, during the pandemic shock, the three major indices all plunged sharply. In 2022, aggressive rate hikes by the Fed led to a 27% drop in the S&P 500 and a 35% decline in the Nasdaq. Last year, after Trump’s tariff policies were announced, the Dow dropped 2,231 points in a single day, a 5.5% decline.

All these historical cases point to a common theme: when asset bubbles inflate to the extreme, policy shifts or external shocks become the final straw that breaks the market.

For Taiwanese investors, these fluctuations have tangible impacts. The U.S. stock market and Taiwan stocks are highly correlated, mainly transmitted through three channels. First is the contagion of market sentiment—U.S. stock declines immediately trigger panic among global investors, leading to sell-offs in Taiwan stocks as well. Second is foreign capital withdrawal—when the U.S. market experiences significant volatility, international investors tend to pull out investments from emerging markets, including Taiwan. The most fundamental impact is economic linkage—since the U.S. is Taiwan’s most important export market, an economic recession in the U.S. directly reduces demand for Taiwanese exports, especially affecting the tech and manufacturing sectors. The recent sharp decline in Nasdaq directly impacted major stocks like TSMC and MediaTek, and Taiwan’s stock index fell hundreds of points in early February and again at the end of March due to U.S. market drag.

When the U.S. stock market crashes, it often triggers typical risk-averse behaviors, with funds flowing from stocks into U.S. Treasuries, the U.S. dollar, gold, and other low-risk assets. In bonds, investors tend to shift into U.S. long-term government bonds, pushing up bond prices and lowering yields. The U.S. dollar, as the ultimate safe-haven currency, tends to appreciate during global panic. Gold, a traditional safe-haven asset, usually rises during stock market crashes, especially when rate cuts by the Fed are expected. However, commodities are more complex; if the decline is caused by geopolitical disruptions affecting supply, oil prices may rise counter to the trend. Cryptocurrencies behave more like tech stocks—during U.S. stock crashes, investors often sell crypto assets for cash.

In facing such volatility, I believe retail investors should adopt several practical measures. First, increase defensive asset allocation in your portfolio—lock in stable interest from quality corporate or government bonds at appropriate levels, or allocate some inflation-linked assets to hedge against energy price swings. Second, pay attention to the weighting of tech stocks—if AI-related stocks are overvalued, consider diversifying risk into defensive sectors like utilities and healthcare. Third, implement risk hedging—use options or inverse ETFs to cope with extreme declines. Fourth, hold cash—when the market direction is unclear, retaining some cash positions allows you to buy cheaper assets after a market oversell.

Reviewing the evolution of the causes behind stock market crashes, I find that each wave of volatility is driven by a combination of asset bubbles, monetary policy shifts, and external shocks. From 1929 to recent geopolitical conflicts, these events serve as reminders that risk management is just as important as pursuing returns. Instead of trying to precisely predict bottoms or chasing highs, it’s better to return to fundamentals—assess your risk tolerance and whether your asset allocation is balanced. Moderately increasing defensive assets, diversifying tech stock concentration, utilizing hedging tools, and holding cash are relatively prudent approaches during extreme volatility.