The recent sharp drop in U.S. stocks is definitely something worth paying close attention to. In particular, after President Trump’s tariff policy was announced in April this year, the market was immediately thrown into confusion. On April 4, the Dow Jones plunged by more than 2,200 points in a single day, a decline of 5.5%. The S&P 500 also fell by nearly 6%. In just two days, the cumulative declines of the three major indexes all exceeded 10%. The impact of this selloff has been substantial, and it makes me want to systematically sort out the underlying reasons.

When it comes to the drop in U.S. stocks, there are actually several main drivers. First is the escalation of geopolitical conflict in the Middle East. After the United States and Israel launched airstrikes against Iran, shipping through the Strait of Hormuz was severely disrupted. As a result, 20% to 25% of the world’s oil maritime transport routes were blocked, oil tankers became stuck in ports, and the risk of oil supply interruptions increased sharply. Brent crude oil prices surged, directly pushing up global energy costs and also raising concerns about supply chain disruptions.

Second is the risk of stagflation brought on by rising oil prices. High oil prices do not only add to corporate costs—especially in the transportation and manufacturing industries—but also lift inflation expectations. Investors started to worry about a “stagflation” scenario, in which economic activity stalls while inflation stays high. In such a situation, corporate profits get squeezed, consumption is suppressed, and monetary policy is put in a difficult bind.

The third reason is policy uncertainty from the Central Bank. The March FOMC meeting decided to keep the policy rate unchanged at 3.5% to 3.75%, but the dot plot showed a significant reduction in the number of expected rate cuts in 2026, which might mean only one cut or possibly no cuts at all. The comments from Powell were also fairly cautious; if inflation runs out of control because of energy prices, the Central Bank might even resume rate hikes. This directly shattered the market’s earlier optimistic expectations of continued rate cuts.

Another factor that cannot be overlooked is profit-taking on AI’s high valuations. Before the U.S. stock selloff, valuations for AI-related sectors had already been at historical highs. The price-to-earnings ratios of some tech giants were clearly above the historical average levels. As investors increasingly doubted the sustainability of AI capital expenditures and progress toward commercialization, and with a strong atmosphere of profit-taking after consecutive gains, capital quickly pulled out from the overvalued AI cohort.

Looking at historical selloffs in U.S. stocks, there’s usually a similar logic behind each one. In the Great Depression of 1929, the Dow Jones crashed by 89% within 33 months, mainly due to the bursting of a leverage bubble combined with the double blow from the trade war. In Black Monday in 1987, the Dow Jones fell by 22.6% in a single day, triggered by chain-selling pressure caused by programmed trading, along with the Central Bank’s tightening policy. In 2000, the dot-com bubble burst; the Nasdaq dropped from 5,133 to 1,108, a decline of 78%, and it took 15 years to recover. The 2008 subprime crisis was even more brutal: the Dow Jones fell from 14,279 to 6,800, a decline of 52%, and the complexity of financial derivatives allowed risk to spread throughout the entire system. During the COVID-19 shock in 2020, U.S. stocks hit circuit breakers multiple times, but the Central Bank’s quantitative easing quickly stabilized the market—recovering all losses within six months and even reaching new highs. In 2022’s rate-hike bear market, the S&P 500 fell 27% and the Nasdaq fell 35%. That was because the Central Bank, in response to the highest inflation in 40 years, aggressively raised rates.

It seems that before every major drop in U.S. stocks, there is a serious asset-price bubble—valuations are already far detached from economic fundamentals. When the bubble inflates to its extreme, a policy shift or an external shock becomes the final straw that crushes the market.

The impact on Taiwan’s stock market is more direct. U.S. and Taiwan stocks have a high degree of linkage, mainly through three channels. The most direct is the transmission of market sentiment. When U.S. stocks crash, it immediately triggers panic among global investors, leading to the selloff of risk assets as well, with Taiwan stocks following suit. Second is the withdrawal of foreign capital. Foreign investors are a key player in Taiwan’s market, and when U.S. markets become volatile, they often pull money out from emerging markets. The most fundamental impact is real-economy linkage. The U.S. is Taiwan’s most important export market; if the U.S. economy enters a recession, demand for Taiwan’s products is directly reduced—especially for technology and manufacturing. This time, the Nasdaq’s sharp decline directly hit heavyweight stocks such as TSMC and MediaTek. As a result, Taiwan’s market dropped by several hundred points in early February and again at the end of March.

When U.S. stocks fall sharply, it usually triggers a typical flight-to-safety pattern: funds move from stocks and cryptocurrencies into U.S. Treasuries, the U.S. dollar, and gold. In the bond market, as investors’ risk awareness rises, they shift toward safer assets. In particular, long-term U.S. Treasuries attract large amounts of capital, pushing bond prices higher and causing yields to fall. However, if the decline is driven by runaway inflation that forces the Central Bank to aggressively raise rates, there could be a “double-kill” situation for both stocks and bonds initially. As the ultimate safe-haven currency, the U.S. dollar tends to appreciate when global investors sell risk assets to buy dollars. Gold, as a traditional safe-haven asset, tends to be bought when the stock market crashes to hedge against uncertainty. If investors also expect the Central Bank to cut rates, gold becomes a double positive. But in extreme moments of panic, investors may sell gold to raise cash to meet margin calls. Commodities typically fall along with the stock market, because slower economic growth means reduced demand for industrial raw materials such as oil and copper. However, if the decline is caused by geopolitical events leading to supply disruptions, oil prices may rise against the trend. Although some people view cryptocurrencies as “digital gold,” their actual behavior is more like tech stocks. When U.S. stocks crash, investors tend to sell cryptocurrencies for cash.

In the face of a sharp drop in U.S. stocks, what should retail investors do? My advice is: first, increase defensive asset allocation in your portfolio. Lock in stable interest income with high-quality corporate bonds or government bonds, or take a moderate allocation to inflation-linked assets to hedge energy-price volatility caused by geopolitical factors. Second, pay attention to the weighting of tech stocks. If AI-related tech stocks have valuations that are too high, they may experience significant volatility when the interest-rate path is unclear. You can moderately diversify risk into defensive sectors such as utilities and healthcare. Third, prepare risk hedging—using CFD, options tools, or an inverse ETF strategy to deal with potential extreme declines. Finally, hold cash. When the market direction is still unclear, keeping part of your cash position can give you the ability to buy cheaper assets after the market becomes oversold.

In the end, looking back at history, even though each major decline in U.S. stocks has its own unique ignition point, it often boils down to a combination of three factors: asset-price bubbles, shifts in monetary policy, and external shocks. From the Great Depression of 1929 to the recent energy crisis triggered by geopolitical conflicts, every period of sharp market volatility is a reminder to investors that risk management matters at least as much as chasing returns. For retail investors, rather than trying to predict the bottom precisely or chasing highs in a follow-the-trend manner while selling lows, it’s better to return to fundamentals: assess your risk tolerance and whether your asset allocation is balanced. Moderately increase defensive assets, diversify away from concentrated tech exposure, make good use of hedging tools, and keep cash reserves to capture subsequent opportunities—these are relatively steady approaches in periods of extreme volatility.