Recent fluctuations in the U.S. stock market are indeed worth paying attention to. The logic behind this decline is actually quite clear; it’s not simply due to geopolitical risks.

First, the most direct factor: escalation of conflicts in the Middle East has led to disruptions in shipping through the Strait of Hormuz, affecting 20-25% of global oil shipping routes, causing Brent crude oil to surge and energy costs to skyrocket. This directly raises operating costs for companies, especially in transportation and manufacturing. But more painfully, high oil prices have triggered concerns about stagflation. Investors are beginning to realize that this is not just a short-term shock but could disrupt the Federal Reserve’s interest rate cut expectations.

The Fed’s March FOMC meeting indeed shattered the market’s optimistic outlook. They kept interest rates steady at 3.5%-3.75%, and the dot plot showed a significant reduction in the number of rate cuts by 2026, possibly only one or none. Powell also stated that if inflation gets out of control, they would consider restarting rate hikes. This directly changed borrowing cost expectations and put revaluation pressure on high-valuation assets.

Then, one of the easiest-to-overlook reasons for the sharp decline in U.S. tech stocks: valuations of AI-related stocks are already at historic highs. The price-to-earnings ratios of some tech giants clearly exceed historical averages, and the market is beginning to question the sustainability of AI capital expenditure and commercialization progress. Against the backdrop of rising geopolitical risk aversion, high-valuation tech stocks have become the primary targets for sell-offs. Capital quickly exits these sectors, leading to significant corrections in tech stocks.

Looking at history helps us understand this pattern. During the Great Depression in 1929, a leverage bubble burst combined with trade wars caused the Dow Jones to plummet 89% over 33 months. On Black Monday in 1987, a vicious cycle of algorithmic trading and the Fed’s liquidity tightening caused a single-day drop of 22.6%. During the dot-com bubble burst in 2000, the Nasdaq fell from 5,133 to 1,108 points, a 78% decline. These events share a common point: asset prices become severely detached from fundamentals, and when policy shifts or external shocks occur, they become the last straw that breaks the market.

The impact on Taiwan stocks is multi-layered. First, market sentiment contagion: a sharp decline in U.S. stocks immediately triggers panic among global investors, and Taiwan’s stock market, as a risk asset, will also come under pressure. Second, foreign capital withdrawals: international investors, to meet liquidity needs, will pull funds from emerging markets. Most fundamentally, the linkage to the real economy: the U.S. is Taiwan’s most important export market, and an economic recession in the U.S. directly reduces demand for Taiwanese products, especially in tech and manufacturing sectors. Leading stocks like TSMC and MediaTek will naturally be the first to suffer.

The capital flow during U.S. stock market crashes also follows a pattern. Investors tend to shift funds from high-risk assets like stocks and cryptocurrencies into safe-haven assets such as U.S. Treasuries, the U.S. dollar, and gold. U.S. government bonds, especially long-term bonds, attract large inflows, pushing bond prices higher and yields lower. The dollar, as the ultimate safe-haven currency, appreciates because global investors sell risk assets to buy back dollars. Gold, as a traditional hedge, also gains popularity, especially when the Fed is expected to cut rates (a double benefit of safe-haven demand and falling interest rates).

How should retail investors respond to this situation? First, increase defensive asset allocations in their portfolios—lock in stable interest income by holding quality corporate or government bonds at appropriate levels, or hedge against geopolitical risks with inflation-linked assets. Second, pay attention to the weighting of tech stocks: if AI-related tech stocks are overvalued, they may experience significant volatility when the interest rate path is uncertain. Diversifying into defensive sectors like utilities and healthcare can be more stable. Third, consider using CFDs, options, or inverse ETFs for risk hedging. Most importantly, maintain cash positions; when market direction is unclear, holding cash allows you to buy cheaper after a market sell-off.

Reflecting on the complexity behind this wave of declines in U.S. tech stocks, my feeling is that risk management is just as important as pursuing returns. Instead of trying to precisely predict bottoms or chasing highs and lows, it’s better to return to fundamentals—review your risk tolerance and asset allocation for balance. Moderately increasing defensive assets, diversifying tech stock concentration, utilizing hedging tools, and holding cash are relatively prudent strategies that often better protect you during extreme volatility than aggressive trading.