Interpreting the Great Decline of U.S. Stocks: From Bubble Burst to Policy Impact

The US stock market has long considered itself a global financial barometer. Its rises and falls not only reflect the US economy’s condition but also profoundly influence asset allocation decisions of investors worldwide. However, intense market volatility is rarely without cause; it often results from the interplay of deep economic imbalances and external shocks.

Historical Trajectory: The Repetitive Cycle of Major US Stock Market Crashes

Looking back, the US stock market has experienced multiple corrections of varying scales. During the Great Depression in 1929, the Dow Jones Industrial Average plummeted 89% over 33 months, primarily due to excessive leverage and speculative sentiment; on “Black Monday” in 1987, a single-day drop of 22.6% triggered a liquidity crisis caused by programmed trading lock-in effects; during the dot-com bubble era in 2000, the Nasdaq crashed from 5,133 to 1,108 points, a decline of 78%.

The 2007-2009 subprime mortgage crisis caused the Dow to fall by 52%, and in 2020, amid the COVID-19 pandemic, the three major indices experienced circuit breakers. The most recent case is the full interest rate hike cycle adjustment experienced by US stocks between 2022 and 2023.

Analysis of the 2022 Major US Stock Market Decline

The reasons behind the 2022 US stock market decline serve as a textbook example. That year, the Federal Reserve responded to an inflation crisis unseen in 40 years by raising interest rates seven times, totaling 425 basis points. The US Consumer Price Index (CPI) in June rose by 9.1% year-over-year, hitting a 40-year high. During this bear market, the S&P 500 fell by 27%, and the Nasdaq declined by 35%. Coupled with the energy supply crisis triggered by the Russia-Ukraine war, soaring oil prices further fueled inflation, creating a dual impact of policy tightening and geopolitical shocks.

Additionally, in April 2025, the Trump administration announced a “reciprocal tariff” policy, once again stirring market turbulence. The Dow plunged 2,231 points in a single day (a 5.5% drop), the S&P 500 fell by 5.97%, and the Nasdaq dropped by 5.82%. Within two days, all three major indices declined over 10%, marking the most severe two-day drop since March 2020.

Causal Chain of Market Bubbles and Trigger Events

Analyzing past US stock market crashes reveals that, in most cases, the market had already accumulated severe asset price bubbles—valuations far detached from economic fundamentals. When these bubbles inflate to their limits, any policy shift or external shock can become the final straw that breaks the market.

The Great Depression of 1929 was caused by high leverage speculation and subsequent trade wars; the 1987 “Black Monday” was triggered by uncontrolled programmed trading combined with prior interest rate hikes leading to liquidity tightening; before the dot-com bubble burst in 2000, the Federal Reserve began rapid rate hikes from late 1999, gradually destroying market confidence in loss-making internet companies. These cases all demonstrate that overvalued markets are most vulnerable—once expectations shift due to policy or events, capital fleeing can intensify instantly.

Ripple Effects: How US Stock Volatility Affects Global Assets

A major US stock market decline typically triggers a “risk-averse mode”—capital rapidly flows from stocks, cryptocurrencies, and other high-risk assets into defensive assets like US Treasuries, the US dollar, and gold.

On the bond side, the most direct impact is observed. Investors sell off stocks en masse and move into government bonds, pushing bond prices higher and yields lower. Historical data shows that whether during bull market corrections or bear transitions, US bond yields tend to decline by about 45 bps over the following six months. However, if the decline stems from hyperinflation (as in 2022), initial rate hikes may cause a “stock-bond double kill” scenario.

Regarding the US dollar, during panic, global investors sell emerging market assets and other currencies to buy dollars for safety, leading to dollar appreciation. When deleveraging occurs, investors unwind dollar-denominated loans, creating substantial buying pressure.

Gold exhibits a dual nature. If a US stock market crash coincides with expectations of rate cuts, gold benefits from both safe-haven demand and declining interest rates; but if it occurs during initial rate hikes, higher rates can suppress gold’s attractiveness.

Commodities usually decline in tandem with stocks, as economic recession fears reduce demand for industrial raw materials. Exceptions occur if the decline is driven by geopolitical conflicts causing supply disruptions, which can push oil prices upward contrary to the trend.

Cryptocurrencies, despite some advocates calling them “digital gold,” tend to behave more like high-risk tech stocks. During US stock crashes, investors often sell crypto assets to raise cash.

Risks of Market Linkage to Taiwan Stocks

US stocks and Taiwan stocks are highly correlated, mainly transmitted through three channels.

Sentiment is the most direct—when US stocks plunge, panic spreads rapidly among global investors, leading to sell-offs in emerging markets like Taiwan. The global stock market crash in March 2020 during the COVID-19 outbreak is a prime example.

Capital flows are equally critical. Foreign investors are key drivers of Taiwan’s stock market. When US markets experience significant volatility, international investors often withdraw investments from emerging markets, including Taiwan, to meet liquidity needs, resulting in selling pressure.

Real economy impacts are fundamental and lasting. The US is Taiwan’s most important export market; an economic recession in the US directly reduces import demand, especially impacting Taiwan’s tech and manufacturing sectors, ultimately reflected in falling stock prices. The performance of Taiwan stocks during the 2008 financial crisis is a case in point.

Investor Strategies

Major US stock market declines are rarely sudden surprises. Investors should monitor four key factors regularly:

Economic data—GDP, employment figures, consumer confidence, and corporate earnings are critical indicators of economic health.

Monetary policy—the Federal Reserve’s interest rate moves are crucial. Rate hikes increase borrowing costs and suppress consumption and investment, pressuring stocks; rate cuts have the opposite effect.

Geopolitical events—international conflicts, political changes, and trade policy adjustments can quickly alter investor sentiment.

Market sentiment—itself a predictor. Optimism can drive stock prices higher, while fear and worries tend to depress them.

In response to market turbulence, practical strategies include adjusting asset allocation—reducing exposure to stocks, increasing cash and high-quality bonds; for knowledgeable investors, cautiously using derivatives like options, such as protective puts, to hedge holdings.

The key is that unhealthy economic data, policy signals, and geopolitical events often surface weeks or months in advance. Careful market monitoring and reducing information gaps are the best ways to position oneself ahead of risks.