## Global Capital Markets Roar Back: The Deep Logic Behind the US Stock Market Plunge and How to Respond

As a global financial barometer, every major fluctuation in the US stock market sends ripples across international markets. From the Great Depression in 1929 to the April crash triggered by Trump's tariff policies in 2025, history repeatedly warns investors: markets are not always rational, and asset bubbles and external shocks often serve as the fuse for market collapses.

## The Latest Case of Contemporary Market Volatility: The 2025 Tariff Crisis

The recent sharp decline in the US stock market occurred in April 2025. The Trump administration introduced an aggressive "reciprocal tariff" policy, imposing a 10% baseline tariff on all trade partners and higher tariffs on countries with trade deficits. This decision exceeded market expectations, instantly igniting fears of global supply chain disruptions.

Data showed that on April 4th, the Dow Jones Industrial Average plummeted 5.50% (down 2,231 points), the S&P 500 index tumbled 5.97%, and the Nasdaq Composite dropped 5.82%. More severely, within two days, all three major indices declined over 10%, marking the worst consecutive declines since the COVID-19 pandemic in 2020.

## Tracing History: Moments That Changed the Market

Looking back over a century of financial history, the US stock market has experienced several major downturns, each caused by different factors but following similar market principles.

**The Great Depression of 1929: The Perfect Storm of Leverage Bubble and Trade War**

The Dow Jones fell 89% over 33 months, a catastrophe stemming from unchecked speculation fueled by excessive borrowing. At that time, stock valuations had severely diverged from real economic growth. The U.S. Congress passed the Smoot-Hawley Tariff Act in 1930, which exacerbated the situation, triggering retaliatory tariffs worldwide. This led to a sharp contraction in global trade, eventually transforming a localized crisis into the Great Depression, with unemployment soaring and the market taking 25 years to recover to pre-crash levels.

**Black Monday 1987: The Out-of-Control Algorithmic Trading**

The crisis was triggered by algorithmic trading, with the Dow plunging 22.6% in a single day. Many institutions employed "portfolio insurance" strategies; when the market suddenly declined on October 19, a large number of them simultaneously triggered sell orders, creating a vicious cycle. The Federal Reserve's prior rate hikes had tightened liquidity, and the combined effects of technical factors and policy environment led to a liquidity crisis. Fortunately, the Fed intervened with liquidity injections, and the market recovered within two years. This crisis also led to the creation of circuit breakers.

**The Dot-com Bubble 2000-2002: The Collapse of Valuation Fantasies**

The late 1990s internet boom caused irrational exuberance, with massive capital flowing into unprofitable online companies. The Nasdaq soared to a peak of 5,133 points before crashing to 1,108, a 78% decline. The Fed's rapid rate hikes starting in late 1999 became the final blow to the bubble, and it took 15 years for the Nasdaq to fully recover.

**The 2007-2009 Subprime Crisis: The Collapse of the Financial System**

The housing bubble burst, triggering a subprime mortgage crisis. Complex financial derivatives spread risk like dominoes across the global financial system. The Dow dropped from 14,279 to 6,800 points, a 52% decline. The crisis shattered market confidence, sparked global financial panic, and pushed US unemployment to 10%. The market only gradually recovered after government intervention in 2013.

**COVID-19 Shock 2020: Sudden Economic Standstill**

The pandemic caused a global economic halt, supply chain disruptions, and sharp drops in corporate earnings. The three major indices triggered multiple circuit breakers in March, with the Dow falling over 30% in a short period. However, thanks to rapid quantitative easing and fiscal stimulus expectations from the Fed, markets rebounded strongly, with the S&P 500 recouping all losses and reaching new highs within six months.

**2022 Rate Hike Cycle: The Counterattack of Inflation**

To combat unprecedented high inflation (CPI reaching 9.1%), the Fed launched aggressive rate hikes in 2022, totaling 425 basis points for the year. The S&P 500 fell 27%, and the Nasdaq declined 35%. The global energy and food crises triggered by the Russia-Ukraine war further intensified inflationary pressures. It wasn't until 2023, when markets re-priced the end of rate hikes and AI investment enthusiasm surged, that US stocks rebounded strongly, recovering all losses.

## Deep Roots of Stock Market Declines

Analyzing these historical events reveals a clear pattern: **the collision between asset bubbles and policy shifts often leads to stock market crashes**.

Excessive leverage and valuations detached from fundamentals are common features of bubbles. Whether it's the speculative frenzy of 1929, the internet hype of 2000, or the housing boom of 2007, markets chase illusory wealth. When policies tighten, economic data deteriorates, or geopolitical risks emerge, these bubbles tend to burst.

External shocks also play a critical role. Trade wars, wars, pandemics, energy crises—these events often serve as triggers. The latest Trump tariff policy exemplifies this pattern in the contemporary context.

## Chain Reaction of US Stock Market Declines on Global Assets

When the US stock market faces significant adjustments, a typical "risk-off" mode is activated—funds flow from high-risk assets to safe havens.

**Safe-Haven Flows in the Bond Market**

During stock crashes, investors flock to US Treasuries, especially long-term bonds. Large capital inflows push bond prices higher and yields lower. Historical data shows that whether in a bull market correction or bear market, US bond yields tend to decline by about 45 basis points over the next six months.

However, if the decline is driven by runaway inflation (as in 2022), initial rate hikes can cause a "double whammy" of falling stocks and bonds. Only when fears shift from inflation to recession do bonds regain their safe-haven appeal.

**US Dollar Appreciation as a Safe-Haven Mechanism**

As the ultimate global safe-haven currency, the US dollar tends to strengthen during market panic. Investors sell emerging market assets to buy dollars, and deleveraging demands for dollar-denominated debt repayment also generate strong dollar buying, pushing the exchange rate higher.

**Gold’s Traditional Safe-Haven Value**

Gold often performs well during stock crashes, as investors buy it to hedge uncertainty. If a sharp decline coincides with expectations of rate cuts, gold benefits from both safe-haven demand and falling interest rates. Conversely, if the decline occurs during early rate hikes, higher rates may suppress gold’s attractiveness.

**Demand for Commodities Weakens**

Stock declines signal economic slowdown, reducing demand for industrial raw materials like oil and copper. Commodity prices usually fall alongside stocks. However, if the decline is driven by geopolitical supply disruptions (e.g., war among oil-producing nations), oil prices may rise against the trend, creating stagflation.

**Cryptocurrencies’ High-Risk Nature**

Although some supporters view cryptocurrencies as "digital gold," their performance is more akin to high-risk tech stocks. During US stock declines, investors often sell cryptocurrencies to raise cash or offset stock losses, causing digital assets to typically fall sharply along with equities.

## How US Stock Volatility Affects Taiwan’s Market

Taiwan’s stock market is highly correlated with the US market, operating through three main channels.

**Immediate Sentiment Spillover**

As a global investment indicator, US stock declines immediately trigger panic among international investors. When risk aversion rises, investors sell risk assets like Taiwanese stocks, creating "panic selling." The over 20% drop in Taiwan’s stock market during the COVID-19 outbreak in March 2020 exemplifies this.

**Direct Impact of Foreign Capital Outflows**

Foreign investors are key players in Taiwan’s market. During US market swings, international investors often withdraw funds from Taiwan to meet liquidity needs or reallocate assets, directly pressuring the local market.

**Fundamental Linkage to the Real Economy**

The US is Taiwan’s most important export market. US economic downturns directly reduce demand for Taiwanese products, especially impacting tech and manufacturing sectors. Expectations of corporate earnings decline are ultimately reflected in stock prices, as seen during the 2008 financial crisis. In 2022, when the Fed’s rate hikes caused US market turbulence, Taiwan’s stocks also experienced noticeable corrections.

## Market Insight: Investor Warning Checklist

Every US stock market crash is not sudden; investors can detect early signs of risk by monitoring key signals:

**Economic Data Diagnostics**

GDP, employment figures, consumer confidence, corporate earnings—these are primary indicators of economic health. Deterioration in these data often precedes stock declines. Regularly tracking these trends helps anticipate market shifts.

**Shifts in Fed Policy Direction**

Rising interest rates increase borrowing costs, potentially dampening consumption and investment, pressuring stocks; falling rates have the opposite effect. Statements from Fed officials, meeting minutes, and monetary policy announcements are critical signals.

**Emerging Geopolitical Risks**

International conflicts, political events, and sudden trade policy changes can trigger market volatility. The recent Trump tariff announcement exemplifies this—unexpected policy declarations can instantly alter market expectations.

**Investor Sentiment Gauge**

Market confidence and panic levels directly influence stock movements. Volatility indices, market participation rates, and margin debt are technical indicators that help assess market psychology.

## Retail Investors’ Defensive Strategies: Proactive Wisdom

In the face of cyclical US stock fluctuations, investors should adopt active risk management rather than passive waiting.

**Dynamic Asset Allocation**

During major corrections, consider reducing exposure to stocks and other risky assets, increasing holdings of cash and quality bonds. This is not about avoiding stocks entirely but balancing risk and opportunity.

**Prudent Use of Derivatives**

For knowledgeable investors, options and other derivatives can be considered. Strategies like protective puts can provide downside protection for holdings, safeguarding gains amid volatility.

**Regular Monitoring and Flexibility**

Establish an investment monitoring checklist, regularly review economic data, policy developments, and market sentiment. When warning signs increase, adjust strategies proactively rather than reacting only during crises.

History repeatedly proves that market volatility is normal, not exceptional. The key lies in whether investors can detect risks early, stay calm amid fluctuations, and navigate each cycle through scientific asset allocation and risk management.