Why did the US stocks plummet? How do historical lessons guide future investments?

The US stock market volatility often serves as a global financial market indicator. When US stocks undergo significant adjustments, not only US investors need to rethink their strategies, but investors in Taiwan must also face impacts from international markets. This article will analyze the underlying mechanisms behind major US stock declines, cross-border transmission pathways, and how investors should respond to market shifts.

Typical Cases and Long-term Patterns of Major US Stock Corrections

Looking back over the past century of financial history, the US stock market has experienced multiple major adjustments, each reflecting different market imbalances:

Deep Drivers Behind Major US Stock Adjustments

Asset Bubbles and Excessive Speculation

A common feature of every US stock market crash is the presence of obvious price bubbles beforehand. Investors, through excessive leverage and chasing high prices, push asset valuations far from their intrinsic values. Before the 1929 Great Depression, retail investors could borrow up to 90% to buy stocks; during the internet bubble, loss-making companies’ stocks were driven to sky-high prices. When market confidence reverses, these fragile valuation systems collapse instantly.

Policy Turning Points

Monetary policy shifts often act as catalysts for bubble bursts. The Federal Reserve began raising interest rates in 1999 to cool an overheating economy, directly puncturing the internet bubble; in 2022, to combat 40-year high inflation, the Fed raised rates by a total of 425 basis points throughout the year, quickly increasing from near zero to 4.25%-4.5%, causing significant declines mainly in tech stocks. Such policy changes alter the entire market’s capital cost structure, making previously overvalued assets less attractive.

Amplification of External Shocks

Geopolitical risks, trade policy changes, natural disasters, and other external events often become the final straw that breaks an already unstable market. In 2025, Trump’s government announced aggressive tariff policies (imposing a 10% baseline tariff on all trade partners, with higher tariffs on deficit countries), which severely exceeded market expectations, immediately triggering fears of global supply chain disruptions, leading to over 10% declines in major indices over two days.

The Multi-dimensional Impact of US Stock Adjustments on Other Asset Markets

US stock declines typically trigger a “risk-off” shift in global capital, with high-risk assets sold off and low-risk assets sought after.

Bonds and Fixed Income Assets

During stock market crashes, risk awareness rises, and large amounts of capital flow into safe-haven instruments like US Treasuries. Historical data shows that whether in bull or bear markets, US bond yields tend to decrease by about 45 bps over the following six months. However, in high-inflation environments (such as 2022), if the Fed continues rate hikes to fight inflation, a “stock-bond double whammy” may occur in the short term. But when market focus shifts from inflation to recession fears, bonds regain their safe-haven role.

US Dollar Appreciation Mechanism

The US dollar is the ultimate safe-haven currency globally. During panic, investors sell emerging market assets and other currencies to buy dollars. Simultaneously, the deleveraging triggered by stock market declines prompts investors to unwind dollar loans, creating strong buying pressure that further pushes up the dollar exchange rate. This forms a self-reinforcing appreciation cycle.

Gold’s Dual Logic

Traditionally, gold is viewed as an inflation hedge and safe-haven asset. During stock market crashes, gold usually appreciates due to increased demand for safety. But this depends on the interest rate environment: if a major decline occurs amid expectations of rate cuts (combining safe-haven demand and falling interest rates), gold benefits from dual support; if it happens during early rate hikes, higher interest rates reduce the attractiveness of holding gold, and its performance may lag behind bonds.

Commodities as Recession Indicators

Stock market declines often signal slowing economic growth and shrinking industrial demand, leading to falling prices for commodities like oil and copper. However, if the decline is driven by geopolitical conflicts causing supply disruptions (e.g., conflicts in oil-producing regions), oil prices may rise countercyclically, creating stagflation scenarios.

Cryptocurrencies as Risk Assets

Although some advocates call cryptocurrencies “digital gold,” their actual performance resembles high-risk assets like tech stocks. During US stock crashes, investors often sell cryptocurrencies to raise cash or cover losses. Recent market volatility confirms this: when US stocks plunge sharply, virtual assets like Bitcoin tend to decline significantly in tandem.

Cross-border Transmission Pathways to Taiwan Stock Market

There is a high positive correlation between US stocks and Taiwan stocks. This linkage is transmitted mainly through three channels:

Synchronized Market Sentiment Shifts

As a global investment barometer, US stock volatility triggers chain reactions. During the March 2020 COVID-19 pandemic spread, US stocks plummeted, causing panic selling worldwide; Taiwan stocks fell over 20% in the same period, illustrating the power of sentiment contagion. When global risk aversion rises, emerging markets like Taiwan are often the first to be affected.

Direct Foreign Capital Outflows

Foreign investors are key participants in Taiwan’s stock market. When facing US stock volatility, international investors often withdraw capital from Taiwan and other emerging markets to meet liquidity needs or rebalance portfolios. This capital outflow exerts immediate selling pressure on Taiwan stocks.

Fundamental Linkages of the Real Economy

The US is Taiwan’s most important export market. US economic recession directly reduces demand for Taiwanese products, especially impacting Taiwan’s tech and manufacturing sectors. Falling corporate earnings expectations eventually reflect in stock prices. During the 2008 financial crisis, Taiwan stocks fell over 50%, a true reflection of this fundamental linkage.

How to Identify Risk Signals Before Volatility?

Investors aiming to anticipate market corrections should focus on monitoring these four key indicators:

Leading Economic Data Signals

GDP growth, unemployment rate, consumer confidence index, corporate earnings, and other economic indicators reflect economic health. When these data weaken, it often signals downward pressure on stocks. In 2022, inflation reaching 9.1%—a 40-year high—was a prelude to the US entering a bear market.

Expectations of Policy Shifts

Federal Reserve rate decisions have profound impacts. When rate hike cycles start or accelerate unexpectedly, they increase corporate financing costs and depress overvalued assets. Conversely, expectations of rate cuts support the stock market. Tracking Fed policy stance changes is crucial for market prediction.

Geopolitical and Policy Changes

External events like international conflicts and trade policy adjustments can trigger risk events. The 2025 tariff policy shift is a typical example; its announcement immediately caused significant market volatility. Investors should pay attention to similar policy risks.

Market Sentiment and Technical Signals

Indicators such as investor confidence, the VIX volatility index, and margin debt reflect market risk appetite. When these indicators reach extremes, they often signal market turning points.

Practical Risk Management Framework for Investors

In the face of potential major US stock adjustments, investors should proactively deploy defensive strategies:

Dynamic Asset Allocation

As market risks rise, moderately reduce risk assets like stocks and increase cash and high-quality bonds. These defensive assets provide stability during market crashes. Historically, adequate cash reserves enable investors to maintain purchasing power at the bottom of crises.

Multi-Asset Hedging Design

Investors can construct portfolios with assets like stocks, bonds, and gold that have relatively low correlations. When stocks decline, bonds and gold’s safe-haven features can offset some losses. Over the long term, such diversified portfolios tend to have lower volatility than single-asset holdings.

Protective Use of Derivatives

Knowledgeable investors can cautiously use options, such as protective puts, to set downside protection for holdings. These strategies can play a clear role in risk control during large market swings.

Real-time Information Acquisition

Reducing information lag is critical. Investors should establish multiple channels for financial news, promptly track economic data releases, Fed moves, international conflicts, and market sentiment shifts. Delayed information often leads to poor decision-making.

Conclusion: Lessons from History and Future Outlook

Every major US stock market decline follows a similar cycle: excessive speculation → policy shift → confidence collapse → capital flight. Each correction causes significant losses but also creates deep buying opportunities. The core task for investors is not to precisely predict the timing of declines but to build defensive systems, control risks, and maintain patience.

For Taiwanese investors, US stock market fluctuations are normal; the key is to stay rational amid volatility, deploy strategies in advance, and respond flexibly. By understanding historical patterns, closely monitoring risk signals, and diversifying assets, investors can effectively reduce the damage from black swan events and even find long-term opportunities during major adjustments.