Recently, I noticed a pretty noteworthy phenomenon: the topic of a major drop in US tech stocks has blown up in investment communities everywhere. Many people are asking what exactly is going on, why the US stock market is falling like this, whether Taiwan’s stock market will also be dragged down, and what they should do with the gold and bonds they hold. Instead of passively waiting for answers, it’s better that we sort these questions out ourselves.

First, let’s talk about the core reasons behind the drop in US tech stocks. The sell-off earlier this year, on the surface, was tied to an escalation in geopolitical conflict: the US and Israel taking military action against Iran, directly blocking one-fifth of the world’s oil transportation routes. When oil prices surged, corporate costs followed suit, hitting the transportation and manufacturing industries the hardest. The market started to worry that the “stagflation” curse might appear—if inflation and an economic recession arrive at the same time, that would be a nightmare for investors.

But that’s only the surface. The deeper issue is that valuations of AI-related tech stocks had already been inflated. The price-to-earnings multiples of those large tech companies were far above historical averages. The market began to doubt whether AI commercialization progress could keep up with the pace of capital expenditures. On top of that, the stance of the central bank has also changed. At the March FOMC meeting, it announced that interest rates would be kept unchanged, and it also hinted that there might not be any major rate cuts—so much so that it even suggested the possibility of further rate hikes if inflation runs out of control. This shattered investors’ dreams of continued rate cuts, and a wave of profit-taking in tech stocks soon followed.

When it comes to a plunge in the US stock market, we have to look back at history. During the Great Depression in 1929, the Dow Jones Industrial Average fell 89% within a little more than 30 months—mainly due to the bursting of leverage bubbles plus a trade war. In Black Monday in 1987, algorithmic trading triggered a chain reaction that caused the Dow to drop 22.6% in a single day. In 2000, the dot-com bubble burst: the Nasdaq fell from over 5,100 points to 1,100 points, taking several years to recover. The 2008 subprime crisis was even worse: the Dow fell from more than 14,000 points to 6,800 points. During the pandemic in 2020, all three major indices triggered circuit breakers, but because of the central bank’s large-scale intervention to stabilize the market, they hit new highs within half a year. Last year’s rate-hike cycle was also fierce, with the S&P 500 down 27%. Earlier this year, the trade policies of the Trump administration exceeded expectations even further: aggressive tariff plans sparked panic about global supply-chain disruptions, and the Dow plunged more than 5% in a single day.

Looking at these historical cases, there’s a particularly clear pattern: before big sell-offs, the market inflates enormous bubbles, and asset prices move far away from fundamentals. When a policy shift or an external shock arrives, it becomes the final straw that breaks the camel’s back.

What about Taiwan’s stock market? To be honest, the correlation between Taiwan stocks and the US market is very high. A plunge in US stocks affects Taiwan through three channels. First is emotional contagion: global investors panic in sync and end up selling risk assets like Taiwan stocks together. Second is foreign capital withdrawal: international investors need to manage liquidity, often pulling money out of emerging markets, with Taiwan being hit first. The most fundamental factor is economic linkage. The US is Taiwan’s largest export market. If the US economy goes into recession, demand for Taiwan’s goods is directly reduced—especially for technology and manufacturing. During the recent wave of US tech stock declines, heavyweight stocks such as TSMC and MediaTek were also hit, and Taiwan’s stock market also fell by several hundred points as a result.

When US stocks fall, capital flows tend to follow a regular pattern. Usually, funds move from high-risk assets like stocks and cryptocurrencies into safe-haven assets such as US Treasuries, the US dollar, and gold. In bonds, as investors’ risk awareness rises, they buy US government bonds—especially long-term bonds—which pushes up bond prices while yields fall in the opposite direction. Historical data shows that within six months after stocks plunge, US bond yields typically drop again by about 45 basis points.

During global panic, the US dollar is the ultimate safe-haven currency. When investors sell assets in emerging markets and switch back to US dollars, the dollar appreciates. Combined with the deleveraging wave triggered by the stock market sell-off—large-scale position closures that require repayment of dollar loans—this creates huge demand for dollars, further boosting the exchange rate.

As for gold: as a traditional safe-haven asset, when stocks crash, investors usually buy gold to hedge risk. But there’s a detail here—if a big decline happens alongside expectations that the central bank will cut interest rates, gold is a double positive. Conversely, if a sell-off occurs in the early phase of rate hikes, higher interest rates can weaken gold’s appeal. Also, in moments of extreme panic, investors may sell gold to raise cash to meet margin requirements—this situation has indeed occurred. However, over the long term, as long as geopolitical conflicts remain unresolved and inflation stays high, gold remains the first choice for hedging risk.

Broad commodities typically fall along with the stock market, because slower economic growth means reduced demand for raw materials like oil and copper. But there’s a special case: if the decline in stock prices is driven by geopolitical causes that interrupt supply, oil prices may rise against the trend and create a stagflation scenario. In recent years, cryptocurrencies have behaved more like tech stocks. When stocks crash, investors tend to sell crypto assets for cash, and prices usually drop sharply as well.

So how should retail investors respond? My view is that instead of trying to predict the bottom precisely or chasing gains after rallies and selling out at lows, it’s better to return to fundamentals. First, review your own risk tolerance and whether your asset allocation is balanced. You can consider adding defensive assets to 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 caused by geopolitics.

Second, pay attention to the weighting of tech stocks. If valuations for AI-related tech stocks are too high, they may see larger volatility when the interest-rate path is unclear. You can moderately diversify risk into defensive sectors such as utilities and healthcare. Proper risk hedging is also important—you can use CFDs, options tools, or inverse ETFs to deal with potential extreme declines. Another tactic is to hold cash. When market direction is unclear, keeping a portion in cash allows us to buy cheap after the market is oversold.

Looking back at history, each time the US stock market plunges, even though the spark is different, the underlying drivers are often the combined effect of three major factors: asset bubbles, shifts in monetary policy, and external shocks. From the Great Depression in 1929 to this year’s geopolitical conflicts, each bout of volatility is reminding us that the importance of risk management absolutely does not fall short of the pursuit of returns. Appropriately increasing defensive assets, diversifying away from concentrated exposure to tech stocks, using hedging instruments well, and keeping cash positions—these are relatively steady approaches during periods of extreme volatility. If you want to try short-selling for hedging, you can also consider some low-barrier tools; the key is to have a clear risk management plan.