Recently, the volatility in the U.S. stock market has indeed made many people restless. Watching the Dow Jones, S&P, and Nasdaq enter correction zones one after another, I am thinking about whether I should organize the reasons behind this stock market plunge and what impact it might have on Taiwanese investors.

Speaking of this recent U.S. stock decline, it mainly results from several overlapping factors. First, the escalation of Middle Eastern geopolitical conflicts. The U.S. and Israel launched airstrikes on Iran’s energy facilities, directly blocking the Strait of Hormuz, which accounts for 20-25% of global oil shipping routes. Oil tankers are being held up, and oil supply risks have greatly increased. Brent crude oil prices soared, pushing up global energy costs instantly, and concerns over supply chain disruptions followed. In this environment, the market entered a “war pricing” mode, where any news of ceasefire negotiations or conflict escalation would trigger intense volatility.

Second, the surge in oil prices has raised fears of stagflation. High oil prices increase costs for businesses, especially in transportation and manufacturing industries, and inflation expectations are also pushed higher. Investors are beginning to worry about the possibility of a stagflation scenario—high inflation combined with economic recession. In this situation, utility and essential consumer stocks tend to be relatively resilient, but technology and growth stocks, which are risk assets, will face significant pressure.

Additionally, there is uncertainty in the Federal Reserve’s monetary policy. The March FOMC meeting decided to keep interest rates unchanged at 3.5%-3.75%, but the dot plot showed a significant reduction in the number of rate cuts expected in 2026, possibly only one cut or none at all, and inflation expectations were revised upward. Chairman Powell’s tone also leaned cautious, emphasizing that if inflation spirals out of control due to energy prices, the Fed might resume rate hikes. This directly shattered the market’s previous optimism about continued rate cuts, leading to increased borrowing costs and valuation re-evaluations.

Another factor not to be overlooked is the overvaluation of AI-related stocks, which accelerated profit-taking. Before this plunge, AI stocks were already valued at historic highs, with some tech giants’ P/E ratios significantly above their historical averages. Investors began doubting the sustainability of AI capital expenditure and commercialization progress. Coupled with a strong profit-taking atmosphere after consecutive gains, capital quickly exited overvalued AI sectors, causing a substantial correction in tech stocks.

Looking back at history, although the reasons for each stock market crash differ, they often involve a combination of asset bubbles, shifts in monetary policy, and external shocks. During the Great Depression in 1929, leverage bubbles burst, and trade wars caused the Dow to plummet 89% over 33 months. Black Monday in 1987 was triggered by algorithmic trading and chain selling, with the Fed’s tightening policies causing a single-day drop of 22.6%. The dot-com bubble from 2000 to 2002 was driven by irrational optimism creating a massive asset bubble, with Nasdaq falling 78%. The 2007-2009 subprime mortgage crisis involved a housing bubble and financial derivatives risks leading to a market crash. The COVID-19 pandemic in 2020 caused a global economic halt and oil price war, resulting in a broad market plunge. The 2022 bear market driven by aggressive Fed rate hikes saw the S&P 500 fall 27%. These historical events remind us that the causes of stock market declines are often complex and multi-layered.

The impact on Taiwan’s stock market is direct. As a global investment barometer, a sharp decline in the U.S. stock market immediately triggers panic among global investors. When risk aversion rises, investors tend to sell risk assets like Taiwan stocks and other emerging markets. Foreign investors are key players in Taiwan’s market, and during U.S. market volatility, they often withdraw investments from emerging markets, including Taiwan. The fundamental impact is linked to the real economy—since the U.S. is Taiwan’s most important export market, an economic recession in the U.S. would directly reduce demand for Taiwanese exports, especially in tech and manufacturing sectors. The Nasdaq’s significant drop also directly impacts major Taiwanese stocks like TSMC and MediaTek.

A U.S. stock market plunge often triggers a typical “flight to safety” mode. Funds flow out of stocks, cryptocurrencies, and other high-risk assets into U.S. Treasuries, the U.S. dollar, and gold—assets considered safer. The bond market tends to be favored as investors’ risk awareness increases, causing U.S. Treasury yields to fall. The U.S. dollar, as the ultimate safe-haven currency, appreciates because global investors sell riskier assets to buy dollars. Gold, a traditional safe-haven asset, tends to rise during stock market crashes due to hedging demand, especially if the Fed is expected to cut rates—this becomes a double positive. Commodities usually decline along with stocks because economic slowdown reduces demand for industrial raw materials like oil and copper. Cryptocurrencies behave more like tech stocks in such times; investors often sell them to raise cash to offset stock losses.

For retail investors, facing this volatility, several strategies are worth considering. First, increase defensive asset allocation in your portfolio—lock in quality corporate or government bonds at reasonable levels for steady interest income, or allocate some inflation-linked assets to hedge geopolitical-driven energy price swings. Second, pay attention to the weight of tech stocks; if AI-related tech stocks are overvalued, they may experience larger fluctuations amid uncertain interest rate paths. Diversify risk into defensive sectors like utilities and healthcare. Third, hedge risks using CFD, options, or inverse ETFs to prepare for potential sharp declines. Fourth, hold cash; when market direction is unclear, keeping some cash allows you to buy cheaper assets after a significant correction.

Ultimately, every market turbulence reminds us that risk management is just as important as pursuing returns. Instead of 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 away from concentrated tech holdings, utilizing hedging tools effectively, and maintaining cash positions to seize future opportunities are relatively prudent approaches during extreme volatility.