Why Do Stock Market Crashes Happen Frequently? Lessons from History, Asset Linkages, and Response Strategies

In the global financial markets, the US stock market has always played the role of a barometer. It reflects the pulse of the US economy and influences the risk appetite of investors worldwide. However, clouds of significant market declines occasionally overshadow the market. From the Great Depression in 1929 to the tariff shocks in 2025, each major stock market crash has left profound lessons. This article reviews significant historical stock market crashes, how they affected other assets, and how investors should prepare.

Landmark Stock Market Crashes in History

The history of US stocks is essentially a history of crises. We have compiled several of the most impactful stock market crashes:

From these data, it is evident that stock market crashes often stem from worsening economic fundamentals, policy reversals, or black swan events, while recovery cycles depend on the strength of liquidity support.

How Stock Market Crashes Affect Other Financial Assets

When the stock market plunges sharply, markets typically enter a “risk-averse mode”—funds withdraw from high-risk assets and flow into defensive assets. This process impacts every corner of the global markets.

The Dual Logic of the Bond Market

US Treasuries are regarded as the safest safe haven globally. During stock market declines, investors buy bonds in large quantities, pushing up their prices and lowering yields. Usually, US bond yields tend to fall about 45 basis points within six months after a stock market crash.

However, there are exceptions. When a decline is driven by hyperinflation (e.g., 2022), and the central bank is forced to aggressively raise interest rates, a “stock-bond double kill” scenario can occur. Only when market risk expectations shift from inflation to recession do bonds regain their safe-haven halo.

The Inevitable Appreciation of the US Dollar

During global panic, the US dollar becomes the second-best safe haven after Treasuries. Investors sell emerging market assets and non-US currencies to buy dollars to hedge risks, causing the dollar to appreciate. Additionally, when stock declines trigger deleveraging, investors need to repay dollar-denominated loans, further boosting dollar demand.

Gold’s Safe-Haven Attributes

As a traditional safe asset, gold’s demand surges during market panic. When stocks fall sharply and market expectations turn to rate cuts, gold benefits from a “safe-haven + falling interest rates” double positive. However, if a major decline occurs early in a rate-hiking cycle, higher interest rates can weaken gold’s appeal, making it underperform bonds.

Divergence in Commodities and Energy

Stock market crashes often signal slowing economic growth, reducing demand for industrial raw materials, leading to declines in oil and copper prices. But there are exceptions—if the crash is caused by geopolitical conflicts disrupting supply (e.g., conflicts among oil-producing countries), oil prices may rise, creating a “stagflation” pattern.

Cryptocurrency Correlation

Although some supporters view cryptocurrencies as “digital gold,” their actual performance is more akin to high-risk assets like tech stocks. During stock market crashes, investors tend to sell crypto assets for cash or to offset losses, causing crypto prices to plummet. Their safe-haven properties are thus unreliable.

How to Identify Risk Signals Before a Stock Market Crash?

Stock market crashes are never without warning signs. Investors can monitor signals across four major areas to anticipate market changes.

Economic Data with Eagle Eyes

GDP growth, unemployment rates, consumer confidence indices, corporate earnings—all are barometers of economic health. Deterioration or signs of slowing growth in these indicators often foreshadow market pressure. Developing a habit of regularly tracking these data points is essential.

Subtle Signals from Central Bank Policies

The Fed’s interest rate decisions directly influence capital costs. Rate hikes suppress consumption and investment, potentially depressing stocks; rate cuts do the opposite. Investors should closely follow Fed meeting minutes, officials’ speeches, and subtle wording changes.

Black Swan Risks from Geopolitics

International conflicts, trade policy shifts, political instability can trigger market sentiment deterioration. These events are often sudden and unpredictable, but staying informed through international news helps investors stay alert.

Market Sentiment Shifts

Collective investor psychology determines capital flows. When bearish sentiment spreads, the VIX (volatility index) rises, and polarization intensifies, the risk of a market correction increases. These sentiment signals should be combined with fundamental analysis to avoid overreaction.

How Should Retail Investors Respond to the Impact of Stock Market Crashes?

History shows that passively enduring market volatility is the least effective approach. Investors need to adopt proactive risk management strategies.

Understanding the Link Between Taiwan Stocks and US Stocks

Major declines in US stocks often transmit quickly through capital flows and sentiment to Taiwan stocks. During the COVID-19 pandemic in March 2020, US stocks plunged, triggering global panic, and Taiwan stocks fell over 20%; similarly, in 2022, US rate hike shocks caused Taiwan stocks to retreat significantly. Monitoring US market movements is crucial for Taiwanese investors.

Rebuilding Asset Allocation

When the risk of a stock market crash rises, investors should:

• Moderately reduce holdings in stocks and other high-risk assets
• Increase cash reserves and high-quality bonds
• Assess correlations among assets in their portfolio to avoid concentration risk

Considering Derivatives for Protection

For knowledgeable investors, cautious use of options and other derivatives can provide protection. Establishing “protective puts” can offer clear downside protection while maintaining upside potential.

The Importance of Information Access

Reducing information gaps is fundamental to good foresight. Investors should build stable information channels, promptly tracking economic data releases, central bank signals, geopolitical developments, etc. Delays in information often cause investors to realize risks only after a crisis has fully unfolded, making it too late.

Conclusion

Stock market crashes are normal rather than abnormal. Every major crash in history teaches us that early risk identification, active position management, and flexible asset allocation are key to survival in investing. In the face of volatility, knowledge and discipline are always the best shields.