Recently, while watching the markets, I noticed that the question of why U.S. stocks plummeted today has been a particularly hot topic in the investment community. After taking a closer look at the market, I found that the reasons behind this wave of decline are actually quite complex and worth sorting out carefully.

A sharp drop in U.S. stocks is usually not caused by a single factor but the result of multiple pressures stacking up. The current escalation of the Middle East geopolitical situation is the most direct trigger. U.S.-led military actions have disrupted shipping through the Strait of Hormuz, blocking 20-25% of global oil shipping routes. The port congestion has driven up Brent crude oil prices. This directly raises global energy costs, increasing transportation expenses for companies, and supply chain risks are emerging as well. The market is beginning to worry about a stagflation scenario.

In addition to geopolitical risks, changes in the Federal Reserve’s policy stance are also exerting pressure. The March FOMC meeting kept interest rates steady at 3.5%-3.75%, but the dot plot showed a significant reduction in the number of rate cuts expected by 2026, possibly only one or none at all, breaking previous market expectations of continued rate cuts. Chairman Powell’s language also leaned toward caution, emphasizing that if energy prices spiral out of control and push inflation higher, the Fed might need to raise rates further. This policy uncertainty directly impacts valuation reassessment, and the expectation of rising borrowing costs follows.

Another factor not to be overlooked is profit-taking in AI-related tech stocks. Before this decline, valuations in the AI sector had already been at historic highs, with some tech giants’ P/E ratios significantly above their historical averages. Investors are increasingly skeptical about the sustainability of AI capital expenditure and commercialization progress. Coupled with the profit-taking atmosphere after consecutive gains, risk aversion has intensified. When risk-off sentiment heats up, funds quickly withdraw from overvalued AI groups, leading to a sizable correction in tech stocks.

Looking at this market movement, I can’t help but think of several major U.S. stock crashes in history. During the Great Depression in 1929, a leverage bubble burst combined with a global recession triggered by trade wars caused the Dow Jones to plunge 89%, taking 25 years to recover. The 1987 Black Monday saw algorithmic trading trigger chain reactions, causing a 22.6% single-day drop. In 2000, the dot-com bubble burst, with the Nasdaq falling from 5,133 to 1,108, a 78% decline. The 2008 subprime mortgage crisis saw the Dow drop from 14,279 to 6,800. In 2020, pandemic shocks caused all three major indices to crash sharply, with monthly declines exceeding 30%. In 2022, aggressive Fed rate hikes hit high-valuation assets, with the S&P 500 falling 27% and the Nasdaq dropping 35%. These historical lessons all point to the same pattern: asset bubbles inflate to the extreme, and policy shifts or external shocks become the final straw that breaks the market.

The impact of U.S. stock declines on Taiwan stocks is very real. Historical data shows a high correlation between U.S. and Taiwan markets. The most direct effect is the contagion of market sentiment—U.S. stock crashes immediately trigger panic among global investors, leading to sell-offs in risk assets like Taiwan stocks. Second, foreign capital withdrawals are also key; international investors tend to pull funds from emerging markets, including Taiwan. More fundamentally, the linkage with the real economy matters—U.S. is Taiwan’s most important export market. An economic recession in the U.S. directly reduces demand for Taiwanese products, especially impacting the tech manufacturing sector. In early February and late March, Taiwan stocks fell sharply due to U.S. market weakness, with heavyweight stocks like TSMC and MediaTek bearing the brunt.

When U.S. stocks fall, they often trigger typical risk-averse responses. Funds flow out of equities and cryptocurrencies into safer assets like U.S. Treasuries, the U.S. dollar, and gold. In bonds, investors seek safety in U.S. government bonds, pushing up bond prices and lowering yields. Historical data shows that U.S. Treasury yields tend to decline by about 45 basis points over the next six months after a stock market decline. The U.S. dollar, as the ultimate safe-haven currency, is sold off from emerging markets in exchange for dollars, pushing up the exchange rate. Gold, as a traditional safe asset, attracts buying when market confidence collapses, though in extreme panic, investors may sell gold to meet margin calls. Commodities usually fall along with stocks because economic slowdown reduces demand, but if declines are driven by geopolitical supply disruptions, oil prices may rise countercyclically. Cryptocurrencies, in recent years, behave more like high-risk assets such as tech stocks—during U.S. stock crashes, investors often sell crypto to raise cash.

So, what should retail investors do in this situation? First, increase defensive asset allocations in your portfolio—lock in stable interest from quality corporate or government bonds, or allocate some assets linked to inflation to hedge geopolitical risks. Second, pay attention to the weight of tech stocks—if AI-related stocks are overvalued, consider diversifying risk into defensive sectors like utilities and healthcare, especially when interest rate paths are uncertain. Third, use CFDs, options, or inverse ETFs to hedge risks. Lastly, keep some cash on hand—when market direction is unclear, having cash allows us to buy cheaper after a decline.

Looking back at history, every major U.S. stock crash, though triggered by different events, often involves a combination of asset bubbles, monetary policy shifts, and external shocks. Risk management is just as important as seeking returns. Rather than trying to precisely predict bottoms or chase highs, it’s better to focus on fundamentals—review your risk tolerance and asset allocation for balance. Increasing defensive assets appropriately, diversifying tech stock concentration, making good use of hedging tools, and holding cash to seize opportunities are relatively prudent strategies in extreme volatility markets.