The underlying logic behind the US stock market plunge: the chain reaction on global capital markets

The U.S. stock market holds a central position in the global financial system, and its every move can trigger intense fluctuations across worldwide markets. Although short-term ups and downs are difficult to predict, significant corrections often conceal deeper economic or policy reasons. This article reviews the causes of major U.S. stock market declines, explores their impact mechanisms on global capital markets, and offers investment strategies for investors.

Analyzing Seven Major U.S. Stock Market Corrections

The Cost of Bubbles and Leverage: The Great Depression of 1929

From October 1929 to 1933, the Dow Jones Industrial Average plummeted 89% over 33 months, marking one of the most severe bear markets in history. The fundamental cause was excessive speculation and accumulated leverage—investors widely engaged in margin trading, causing stock prices to detach from real economic fundamentals.

As economic fundamentals worsened and trade policies became chaotic, this leverage-fueled tower collapsed instantly. The U.S. Congress passed the Smoot-Hawley Tariff Act in 1930, significantly raising tariffs on over 20,000 imported goods, triggering a global retaliatory trade war. This led to a sharp contraction in global trade, transforming the financial crisis into the Great Depression. It took 25 years for markets to recover to pre-crash levels.

Uncontrolled Algorithmic Trading: Black Monday 1987

On October 19, 1987, the Dow dropped 22.6% in a single day, and the S&P 500 fell 34%. This “Black Monday” was caused by uncontrolled algorithmic trading systems. At the time, institutional investors widely adopted quantitative strategies like portfolio insurance, where computers automatically sold stock index futures to hedge against declines.

Unexpectedly, when the market suddenly declined on October 19, thousands of institutions triggered sell orders simultaneously, creating a vicious cycle that escalated into a liquidity crisis. Additionally, the Federal Reserve adopted a relatively tight monetary policy to curb inflation and stabilize the dollar, further tightening market liquidity. The combination of technical and policy factors exacerbated the crisis, leading to the creation of circuit breakers. Markets recovered within two years.

The Dot-com Bubble Burst: 2000-2002 Internet Stock Collapse

In the late 1990s, the rise of the internet industry sparked global investment frenzy. Massive capital flooded into related companies, pushing the Nasdaq index from a high of 5,133 points down to 1,108 points, a 78% decline, with many unprofitable internet companies’ stocks soaring to sky-high valuations.

To cool an overheating economy, the Federal Reserve began rapidly raising interest rates at the end of 1999. As doubts about these companies’ profitability deepened, investor confidence collapsed. The bursting of this bubble led to numerous company failures, and it took 15 years for the Nasdaq to recover its previous highs.

The Spread of Financial Derivative Risks: 2007-2009 Subprime Crisis

The U.S. housing market had accumulated a massive bubble after long-term prosperity. Excessive expansion of the subprime mortgage market was the trigger. When home prices started falling and many borrowers with poor credit defaulted, a wave of defaults ensued.

More deadly was the complexity of financial derivatives. Financial institutions packaged subprime loans into structured financial products and sold them globally. When housing prices declined and defaults increased, these derivatives’ values plummeted, and risks spread like dominoes through the entire financial system. The Dow fell from a high of 14,279 points to 6,800, a 52% drop. The Fed launched quantitative easing to stabilize markets, but full recovery didn’t occur until 2013, with unemployment soaring to 10%.

The Black Swan of the Pandemic: COVID-19 Crisis 2020

The global COVID-19 pandemic forced countries to implement lockdowns, halting economic activity, breaking supply chains, and drastically reducing corporate earnings expectations. In March 2020, U.S. markets triggered multiple circuit breakers, with the Dow, S&P 500, and Nasdaq all plunging sharply—over 30% in the short term. Uncertainty about the pandemic’s trajectory sparked widespread panic.

Simultaneously, the oil price war between Saudi Arabia and Russia further intensified fears, causing oil prices to crash and energy sectors to shake. However, the Fed quickly launched massive quantitative easing, injecting liquidity, and combined with expectations of fiscal stimulus, the S&P 500 not only recovered all losses within six months but also hit record highs.

The Pain of Rate Hike Cycles: 2022 Bear Market

To combat inflation unseen in four decades, the Fed initiated the most aggressive rate hike cycle since the 1980s in 2022. U.S. CPI rose 9.1% year-over-year in June, a 40-year high. The Fed raised interest rates seven times throughout the year, totaling 425 basis points, pushing the federal funds rate target from near zero to 4.25%-4.5%.

Against this backdrop, the S&P 500 declined 27%, and the Nasdaq fell 35%. The outbreak of the Russia-Ukraine war further triggered a global energy and food supply crisis, causing oil prices to surge and inflation to worsen. However, as inflation gradually came under control and markets anticipated the end of rate hikes, combined with AI investment enthusiasm, U.S. stocks surged in 2023, fully recovering 2022 losses and reaching new all-time highs.

The Trade Policy Shockwave: Tariff Wars of 2025

In April 2025, Trump’s administration announced aggressive trade policies, imposing a 10% “minimum baseline tariff” on all trading partners, and applying higher tariffs on deficit countries based on “trade balance” principles. This policy far exceeded market expectations, immediately causing deep fears of supply chain disruptions worldwide.

On April 4, the Dow plunged 2,231.07 points (5.50%), the S&P 500 fell 322.44 points (5.97%), and the Nasdaq Composite dropped 962.82 points (5.82%). All three indices declined over 10% in two days, marking the worst two-day drop since March 2020. As tariff negotiations eased, markets gradually recovered, but the threat of policy escalation remained.

Transmission Mechanisms of Major U.S. Stock Market Declines to Global Capital Markets

Major declines in U.S. stocks often trigger a typical “risk-averse mode,” with funds rapidly flowing from high-risk assets like stocks and crypto into low-risk assets such as U.S. Treasuries, the dollar, and gold.

The Safe-Haven Appeal of Bonds

When stocks plunge, investors’ risk awareness rises, prompting a shift to safer assets. U.S. Treasuries, especially long-term bonds, are regarded as top global safe havens. Large capital outflows from equities into bonds push bond prices higher and yields lower.

Historical data shows that whether during bull market corrections or transitions to bear markets, U.S. bond yields tend to decline by about 45 basis points over the following six months. However, if the decline is driven by hyperinflation (e.g., 2022), forcing aggressive rate hikes by the Fed, initial reactions may show simultaneous declines in stocks and bonds (“double whammy”). But when fears shift from inflation to recession, bonds’ safe-haven role reasserts dominance.

The Ultimate Safe-Haven Currency: The US Dollar

During periods of global market panic, the dollar is the second most important safe-haven after U.S. Treasuries. Investors tend to sell riskier emerging market assets and other currencies to buy dollars, causing the dollar to appreciate. Additionally, during deleveraging in stock declines, investors need to unwind dollar loans, creating substantial dollar buying pressure that further boosts the dollar exchange rate.

The Dual Drivers of Gold

Gold is a traditional safe-haven asset. When stocks crash and market confidence collapses, investors buy gold to hedge against uncertainty, pushing gold prices higher. If a stock market decline coincides with expectations of Fed rate cuts, gold benefits from both risk-hedging and lower interest rates (dual positive). Conversely, if a major decline occurs early in a rate hike cycle, higher interest rates may suppress gold’s attractiveness, making its performance less robust than bonds.

Commodities as Leading Indicators of Economic Cycles

Stock market declines often signal slowing or contracting economic growth, reducing demand for industrial raw materials like oil and copper. Consequently, oil and copper prices usually fall in tandem with stocks. However, if declines are driven by geopolitical events causing supply disruptions (e.g., wars among oil-producing nations), oil prices may rise counter to the trend, creating a stagflation scenario.

Crypto as a Risk Asset

Although some supporters view cryptocurrencies as “digital gold,” recent market volatility shows their performance aligns more with high-risk assets like tech stocks. Bitcoin’s correlation with U.S. stocks has increased, and during stock crashes, investors often sell crypto holdings to raise cash or offset losses, causing crypto prices to fall sharply alongside equities. This reflects the nature of crypto as a risk asset rather than a safe haven.

How U.S. Stock Market Volatility Affects Taiwan’s Market

Historical data indicates a high correlation between U.S. and Taiwan stock markets. Major U.S. market declines impact Taiwan through three main channels:

Market Sentiment Spillover: As a global investment barometer, a U.S. market crash immediately triggers panic among global investors. When risk aversion rises, investors tend to sell risk assets like Taiwan stocks, creating a “panic selling” effect. The 2020 March pandemic-induced global sell-off is a prime example—Taiwan stocks fell over 20% simultaneously.

Foreign Capital Flows: Foreign investors are key players in Taiwan’s market. During significant U.S. market swings or declines, international investors often withdraw funds from emerging markets, including Taiwan, to meet liquidity needs or reallocate assets, exerting downward pressure on Taiwan stocks. In April 2022, when aggressive Fed rate hike signals caused turbulence in U.S. markets, Taiwan stocks also experienced notable corrections.

Real Economy Linkages: The U.S. is Taiwan’s largest export market. An economic recession in the U.S. directly reduces demand for Taiwanese exports, especially in tech and manufacturing sectors. Declining corporate earnings expectations eventually reflect in stock prices. The 2008 financial crisis vividly demonstrated this connection.

How to Detect Warning Signs Before Turbulence Arrives

Every major U.S. stock market decline is not accidental. Investors should focus on four key factors influencing market movements:

Economic Data: GDP, employment figures, consumer confidence, corporate earnings—all are vital indicators of economic health. Strong data can boost markets; weak data may trigger declines.

Federal Reserve Monetary Policy: When interest rates rise, borrowing costs increase, potentially dampening consumption and investment, pressuring stocks; when rates fall, the opposite occurs. Over the past two decades, this factor has gained increasing importance.

Geopolitical Events: International conflicts, political developments, trade policies can directly impact investor expectations. These external shocks are often unpredictable but can be anticipated by monitoring international news.

Market Sentiment: Investor confidence and fear influence short-term trends. Optimism can drive markets higher; panic or worries about economic prospects can lead to declines. Sometimes, these factors interact—policy changes affect economic data, which in turn influence sentiment, culminating in market volatility.

Regularly monitoring these sources helps investors anticipate market shifts. Reducing informational gaps is the first step in managing risks. Unfavorable economic data, Fed policy signals, geopolitical tensions, and abnormal investor sentiment indicators should raise alerts.

Risk Management Strategies for Retail Investors During Major U.S. Stock Market Declines

Historical experiences show that retail investors should stay alert and adopt proactive risk management when facing sharp market swings.

Asset allocation should involve reducing exposure to stocks and other risky assets, while increasing holdings of cash and high-quality bonds. This provides a buffer during downturns and maintains participation in market rebounds.

For knowledgeable investors, cautious use of derivatives like options can be effective. Strategies such as protective puts can offer downside protection for holdings, limiting losses during volatile periods.

Diversification remains a classic risk mitigation approach. Avoid concentrating all funds in a single asset or market; instead, build a diversified portfolio across regions and asset classes. When U.S. stocks decline sharply, other markets or assets may perform relatively stably, balancing overall portfolio volatility.

Finally, cultivating a long-term investment mindset is crucial. History shows that despite short-term volatility, markets tend to recover and reach new highs over time. Maintaining a reasonable position size and exercising patience are often the most effective ways to navigate market fluctuations.