Why did the US stock market drop sharply? How to respond to this impact on Taiwan stocks, gold, and the bond market?

As the global barometer of financial markets, every fluctuation in the US stock market affects investors worldwide. When the US stocks experience sharp corrections, the impact is felt far beyond Wall Street traders—assets like Taiwan stocks, gold prices, bond yields, and others will also tremble in response. Understanding the logic behind major US stock declines and learning to anticipate and respond are essential lessons every investor must master.

How Should Investors Respond to Significant US Stock Corrections?

Faced with intense volatility in the US stock market, passive reactions are not the best choice—proactive strategies are preferable. Investment advice can be divided into two levels:

Macro Asset Allocation: When clear downward signals emerge in US stocks, it is prudent to moderately reduce exposure to risk assets like equities and instead increase holdings of cash reserves and high-quality bonds. This is not about completely exiting the market but about dynamically balancing to control risk exposure.

Specific Operational Tactics: For investors with relevant knowledge, consider using derivatives (such as put options) to construct “protective put” strategies, setting clear downside protection levels for existing holdings. Although this approach involves certain costs, it can provide effective risk buffers in extreme market environments.

Historical facts repeatedly confirm this: during the global stock market crash triggered by the COVID-19 pandemic in March 2020, Taiwan stocks fell over 20%; in April 2022, when the Federal Reserve signaled aggressive rate hikes, Taiwan stocks also experienced significant corrections. Early defensive positioning is often more effective than trying to repair damage after the fact.

Deep Dive: The Historical Trajectory of Causes Behind US Stock Market Crashes

To understand why US stocks crash, it’s helpful to review some landmark major declines in history.

The Great Depression of 1929 remains the most catastrophic disaster in capital market history. The Dow Jones Industrial Average plummeted 89% over 33 months, taking 25 years to recover. The root causes were excessive leverage speculation and deteriorating economic fundamentals. Investors widely borrowed to buy stocks, causing prices to disconnect from the real economy. Even more damaging was the subsequent enactment of the Smoot-Hawley Tariff Act, which sharply increased tariffs on over 20,000 imported goods, provoking global retaliatory tariffs and transforming a localized financial crisis into the Great Depression. This lesson shows that policy mistakes and trade conflicts can greatly amplify the destructive power of US stock crashes.

Black Monday in 1987 demonstrated the power of technical risks. The Dow plunged 22.6% in a single day, and the S&P 500 fell by 34%. This disaster was triggered by uncontrolled algorithmic trading—at that time, institutional “portfolio insurance” strategies collectively triggered during market downturns, causing an infinite loop of automatic selling, leading to a liquidity crisis. The Federal Reserve’s aggressive rate hikes further exacerbated this risk. After this event, mechanisms like circuit breakers were introduced to provide market safeguards.

The Dot-com Bubble of 2000-2002 revealed the costs of irrational exuberance. The Nasdaq soared to a peak of 5133 points and then collapsed 78% to 1108 points. During that era, internet companies’ valuations skyrocketed without any earnings support. When the Fed began raising interest rates to cool the overheated economy, the bubble burst, leading to many corporate bankruptcies. It took Nasdaq 15 years to regain its footing.

The Subprime Mortgage Crisis of 2007-2009 exposed the fragility of modern financial systems. The housing boom masked deteriorating credit quality, and the overexpansion of subprime mortgage markets created systemic risks. As home prices declined and defaults surged, complex derivatives spread risk like dominoes. The bankruptcy of Lehman Brothers was the final straw. The Dow fell from 14,279 to 6,800 points, a 52% decline. After massive government bailouts, the market only fully recovered by 2013.

The COVID-19 Shock of 2020 showcased the instantaneous destructive power of black swan events. Lockdowns, supply chain disruptions, and collapsing corporate earnings expectations hit hard. Coupled with the Saudi-Russia oil price war, oil prices plunged, intensifying panic. The Dow, S&P 500, and Nasdaq all triggered circuit breakers. Despite the depth of the decline, the rebound was swift—thanks to rapid Fed intervention and massive liquidity injections, the S&P 500 not only recovered all losses within six months but also hit new all-time highs.

The 2022 Rate Hike Bear Market exemplifies the impact of abrupt monetary policy shifts. To combat inflation reaching 9.1% (CPI), the Fed aggressively raised interest rates seven times within a year, totaling 425 basis points. The S&P 500 declined by 27%, and Nasdaq by 35%. However, by 2023, as inflation eased and AI enthusiasm boosted markets, US stocks exited the bear market and reached new highs.

The Trump Tariff Shock of 2025 introduces new uncertainties. In early April, the Trump administration announced a 10% baseline tariff on all trading partners, with higher tariffs based on trade deficits. This unexpected policy caused US stocks to fall over 10% in two days (the worst since March 2020), with the Dow dropping 2,231 points in a single day, a 5.50% decline. Although markets gradually digested this news, the threat of escalating trade policies still looms overhead.

Common Patterns Behind US Stock Market Crashes

Analyzing these historical events reveals a common pattern: US stock crashes often follow a buildup of asset bubbles—where stock prices become severely disconnected from economic fundamentals. When policies shift, recession signals appear, or unexpected shocks occur, the bubble bursts.

Bubbles form due to multiple factors: excessive leverage, irrational market optimism, excess liquidity, etc. Once triggered, panic spreads rapidly among investors, creating a negative feedback loop of “sell to avoid losses.” This explains why causes of US stock crashes seem diverse but fundamentally follow a “bubble—burst—panic” sequence.

How US Stock Crashes Impact Other Assets

A sharp decline in US stocks typically triggers a “flight to safety,” with capital flowing from high-risk assets into safe-haven assets.

Bond Markets: Tend to rally significantly. Investors withdraw from equities into US Treasuries, especially long-term bonds. Historical data shows that after any stock correction, US bond yields usually fall by about 45 basis points over the next six months. However, if the decline is driven by runaway inflation (like in 2022), initial phases may see a “stock-bond sell-off”—only when focus shifts from inflation to recession does the safe-haven role of bonds reassert itself.

US Dollar: Appreciates. During panic, global investors sell risk assets and repatriate funds into dollars. Additionally, deleveraging triggered by stock declines creates large dollar demand for margin calls, further strengthening the dollar. The dollar is second only to US Treasuries as a safe-haven currency.

Gold: Serves as a classic safe-haven asset. Investors buy gold to hedge against uncertainty, especially when markets expect the Fed to cut interest rates (a dual benefit of safe-haven demand + lower rates). Gold prices tend to strengthen in such scenarios. Conversely, if declines occur early in a rate-hiking cycle, higher interest rates can diminish gold’s appeal.

Commodities: Usually decline. Stock market drops signal economic slowdown, reducing demand for industrial raw materials. Oil and copper prices tend to weaken unless the decline is supply-driven (e.g., conflicts in oil-producing regions).

Cryptocurrencies: Often disappoint “digital gold” believers. Despite supporters positioning Bitcoin and others as safe havens, recent trends show their correlation with high-risk assets like tech stocks. During US stock crashes, investors often sell cryptocurrencies to raise cash or cover losses.

What Does a US Stock Market Crash Mean for Taiwan Stocks?

Taiwan stocks are highly correlated with US stocks, and major US market declines impact Taiwan through three main channels:

First, direct contagion of market sentiment. As a global investment indicator, a US stock crash immediately triggers panic worldwide. Taiwan stocks, as risk assets, are sold off in tandem. The March 2020 pandemic outbreak exemplifies this—both US and Taiwan markets plunged almost simultaneously due to sentiment contagion.

Second, foreign capital flows. Foreign investors are key participants in Taiwan’s stock market. During heightened US stock volatility, international investors often withdraw funds from Taiwan and other emerging markets to meet liquidity needs or reallocate assets, exerting direct selling pressure.

Third, the linkage with the real economy. The US is Taiwan’s most important export destination. An economic recession in the US implies reduced demand for Taiwanese goods, especially impacting tech and manufacturing sectors’ earnings expectations. This transmission mechanism was most evident during the 2008 financial crisis—profit declines directly reflected in stock prices.

How to Detect Early Warning Signs of US Stock Market Crashes?

Every US stock crash doesn’t happen out of nowhere. Investors can monitor four key areas to identify risks in advance:

Economic Data: GDP growth, unemployment rate, consumer confidence index, corporate earnings—these indicators serve as barometers of economic health. Deterioration often precedes stock declines.

Monetary Policy: The Fed’s interest rate decisions directly influence borrowing costs. Rate hikes can suppress consumption and investment, pressuring stocks; rate cuts can inject liquidity and support markets.

Geopolitical Events: International conflicts, trade tensions, policy shifts often act as triggers for US stock declines. Recent examples include trade wars and regional conflicts.

Market Sentiment: Investor confidence indices, fear gauges, and sentiment surveys reflect market psychology. Sharp shifts in sentiment often foreshadow major market moves.

These four dimensions are interconnected—policy changes can influence economic data, which in turn affect sentiment, ultimately leading to market volatility. Building a comprehensive monitoring system helps investors catch early signals.

Summary

The causes of US stock market crashes are complex and varied, but they all follow the fundamental logic of “bubble—burst—panic.” Whether it’s the leverage bubble of 1929, the tech frenzy of 2000, the inflation surge of 2022, or the trade policy shocks of 2025, they all reveal the market’s cyclical fragility.

For investors, the key isn’t to predict exactly what will cause the next US stock crash but to recognize that it will happen eventually and prepare accordingly. By dynamically adjusting asset allocations, paying attention to early warning indicators, and understanding asset transmission mechanisms, we can respond more calmly when risks materialize.