Recently, I’ve noticed a rather thought-provoking phenomenon: the frequent occurrence of major declines in the U.S. stock market, with each event seemingly triggering a chain reaction. I’ve summarized my experiences over the past few years and want to share some thoughts on how to respond.

First, let’s talk about the direct causes of this wave of decline. The escalation of Middle Eastern geopolitical conflicts directly impacted the transportation of oil through the Strait of Hormuz, blocking 20-25% of global oil shipping routes, causing oil prices to spike instantly. High oil prices not only increased corporate costs but also sparked fears of stagflation, a particularly dangerous combination. At the same time, the Federal Reserve hinted at significantly reducing interest rate cuts and possibly resuming rate hikes during the March FOMC meeting, breaking market expectations of continued easing. Plus, AI-related tech stocks had already been valued at historic highs, prompting profit-taking. When risk aversion rises, tech stocks are among the first to be hit.

Looking back at history, major declines in the U.S. stock market are never isolated events. During the Great Depression in 1929, leverage bubbles burst combined with trade wars, causing the Dow Jones to plummet 89% over 33 months. On Black Monday in 1987, algorithmic trading triggered a chain of selling, leading to a 22.6% single-day crash. The dot-com bubble burst in 2000, with the Nasdaq dropping from 5,133 to 1,108, a 78% decline. The 2008 subprime crisis, with the housing bubble and financial derivatives risks spreading, saw the market fall 52%. During the COVID-19 pandemic in 2020, multiple circuit breakers were triggered, but the Fed quickly intervened, recovering losses within half a year. Last year, during the rate hike cycle, the S&P 500 fell 27%, and the Nasdaq dropped 35%. Recently, after Trump’s tariff announcement in April 2025, the Dow plunged 5.5% in a single day, with the three major indices losing over 10% in two days.

Looking at these historical cases, the pattern is quite clear: asset bubbles inflate to the extreme, and when policy shifts or external shocks occur, markets begin to slide.

For Taiwanese investors, the impact of a major U.S. stock market decline manifests in three layers. The most immediate is emotional contagion—U.S. market crashes trigger panic among global investors, leading to sell-offs in Taiwan stocks. Second, foreign capital withdrawals—international investors may pull funds from emerging markets to meet liquidity needs, putting pressure on Taiwan stocks. The most fundamental is the linkage to the real economy—U.S. economic recession directly reduces demand for Taiwanese products, especially in tech and manufacturing, which will reflect in corporate earnings and stock prices.

As for other financial assets, a sharp decline in U.S. stocks usually triggers typical safe-haven responses. In bonds, investors flock to U.S. Treasuries for safety, pushing bond prices up and yields down. The dollar tends to appreciate as global investors sell risk assets to buy back dollars. Gold, as a traditional safe-haven asset, usually sees increased buying, especially when markets expect the Fed to cut rates (driving safe-haven demand and lowering interest rates). Commodities generally decline along with stocks, as slowing economic growth reduces demand—unless the decline is driven by geopolitical supply disruptions, in which case oil prices might rise counter to the trend. Cryptocurrencies have behaved more like tech stocks in recent years; during stock market crashes, investors tend to sell crypto holdings to raise cash.

What should retail investors do? My advice is as follows. First, increase defensive asset allocations in your portfolio, such as high-quality corporate or government bonds for stable income, or inflation-linked assets to hedge energy price volatility. Second, monitor the weight of tech stocks—if AI valuations are excessively high and the interest rate outlook is uncertain, consider diversifying into defensive sectors like utilities and healthcare. Third, implement risk hedging strategies using CFDs, options, or inverse ETFs to cope with extreme declines. Fourth, keep cash reserves—having cash on hand when the market direction is unclear allows us to buy at lower prices after a sell-off.

Ultimately, 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 focus on fundamentals—review your risk tolerance and asset allocation for balance. Moderately increasing defensive assets, diversifying away from tech concentration, utilizing hedging tools, and maintaining cash reserves to seize opportunities are relatively prudent approaches during extreme volatility.