The source of global financial market volatility: An in-depth look at the drivers behind the US stock market crash and the chain reactions

In the landscape of international investments, every move of the US stock market influences the nerves of global capital markets. This largest stock trading market in the world not only serves as a barometer for wealth flow but also as the most sensitive indicator of economic expectations changes. However, markets never play by the rules, and the intense volatility and sharp declines in US stocks act like an invisible force, sending ripples worldwide. What factors cause the US stock downturns? How do these fluctuations impact Taiwan stocks, precious metals, and fixed income assets? How should investors respond to sudden market shifts? This article will analyze these concerns one by one.

Historical US Stock Market Crashes: A Seven-Time In-Depth Review

Market volatility is not a one-day event. Reviewing some of the most representative US crises in history can help investors understand the true nature of the market:

The Great Depression of 1929 The Dow Jones Industrial Average plunged by up to 89% within just 33 months, caused by excessive speculation and leverage risks, severe deterioration of economic fundamentals, and unstable trade policies. Ultimately, it led to a global economic collapse, skyrocketing unemployment, and a 25-year recovery period for the stock market.

Black October 1987 A single-day drop of 22.6%, with the S&P 500 falling 34%. Algorithmic trading spiraled out of control, market valuations inflated, and interest rates surged, triggering a liquidity crisis. Fortunately, the Federal Reserve intervened with timely liquidity injections, and the market recovered within two years. This event also led to the creation of circuit breakers.

The Tech Bubble of 2000-2002 The Nasdaq declined from its peak of 5133 points to 1108 points, a 78% drop. The internet industry bubble, weak profitability of listed companies, and Fed rate hikes were the main causes. Many tech stocks delisted or went bankrupt, and it took 15 years for the Nasdaq to regain its former glory.

The Subprime Mortgage Crisis of 2007-2009 The Dow fell from 14,279 to 6,800 points, a 52% decline. The real estate bubble, excessive expansion of subprime lending, and the chain reaction of Lehman Brothers’ collapse triggered a global financial storm. Unemployment soared to 10%, and after government rescue measures, the market recovered by 2013.

The Pandemic Shock of 2020 The three major indices triggered circuit breakers multiple times, with the Dow dropping over 30% in a month. COVID-19 caused economic standstill and supply chain disruptions. Under massive easing policies and fiscal stimulus, markets rebounded quickly, with the S&P 500 reaching a new high in just six months.

The 2022 Fed Rate Hike Cycle The S&P 500 declined 27%, and the Nasdaq fell 35%. The core reasons were inflation soaring to a 40-year high of 9.1% and the Fed raising interest rates by 425 bps throughout the year. As rate hike expectations waned and AI investment enthusiasm surged, US stocks rebounded strongly in 2023.

The Tariff Policy Turmoil of 2025 In early April, the Dow plunged 2,231.07 points (5.50%), the S&P 500 fell 5.97%, and the Nasdaq declined 5.82%. Sudden escalation of tariffs caused chaos in global trade expectations, with all three indices dropping over 10% within two days, marking the most intense two-day decline since March 2020.

Analyzing the Deep Roots of US Stock Declines

By comparing these historical events, a key pattern emerges: Most major US stock declines are preceded by the accumulation of enormous asset bubbles, with prices diverging significantly from economic fundamentals. When policy shifts or unexpected events occur, they become the critical points that burst the bubbles.

Leverage Bubbles and Speculative Frenzy: Lessons from 1929

Back then, investors widely borrowed to leverage their stock purchases, causing valuations to far outpace economic growth. After trade wars erupted, in 1930, the US Congress passed the Smoot-Hawley Tariff Act, heavily taxing over 20,000 imported goods. This triggered retaliatory tariffs worldwide, sharply contracting global trade, and evolving into a global economic depression.

Risks of Algorithmic Trading: The 1987 Warning

Institutions widely adopted “portfolio insurance” strategies, attempting to automatically sell futures to hedge during declines. On October 19, 1987, when the market suddenly dropped, thousands of institutions triggered sell orders simultaneously, creating a vicious cycle and liquidity crisis. The Fed’s prior rate hikes further tightened liquidity, and the combined forces ignited the market storm.

Tech Stock Valuation Divergence: Lessons from 2000-2002

The late 1990s internet boom attracted astronomical capital, causing valuations to disconnect from earnings. The Fed began rapid rate hikes from late 1999 to cool the overheating economy, ultimately crushing the fragile tech sector.

Real Estate and Financial Derivatives Risks: The 2007-2009 Crisis

During the US housing boom, a massive bubble formed, with unlimited expansion of subprime mortgage markets. After house prices declined, many borrowers defaulted, and the spread of complex financial derivatives transmitted risks globally. Derivative values plummeted, investor confidence collapsed, and asset sell-offs ensued.

Pandemic and Supply Chain Disruptions: The 2020 Shock

Global lockdowns halted economies, factories shut down, and consumption plummeted. Simultaneously, the oil price war between Saudi Arabia and Russia intensified market panic and asset sell-offs.

Inflation Out of Control and Monetary Policy Shift: The 2022 Bear Market

Unprecedented high inflation (9.1% annually) prompted the Fed to implement the most aggressive rate hikes since the 1980s, raising rates by 425 bps over the year. The Russia-Ukraine war triggered energy and food crises, further fueling inflationary pressures.

New Challenges in Global Trade Order: The 2025 Policy Shift

The Trump administration announced a 10% baseline tariff on all trade partners, with higher tariffs based on trade deficits. This policy exceeded market expectations, fundamentally disrupting current global trade rules, causing deep fears of supply chain breakdowns and chaos in the trade system.

How Do US Stock Fluctuations Impact Other Asset Classes?

Major declines in US stocks typically trigger “risk-off” flows, with investors shifting funds from equities and emerging markets into US Treasuries, USD, and gold.

Bond Market Performance

During stock crashes, risk aversion rises, leading to large outflows from equities into bonds, pushing bond prices higher and yields lower. US Treasuries, especially long-term bonds, are favored as global safe-haven assets.

However, if the decline stems from runaway inflation (like in 2022), aggressive Fed rate hikes may initially cause a “bond and stock sell-off.” But when market fears shift toward recession, bonds regain their safe-haven role. Historical data shows that in both bull and bear corrections, US bond yields tend to fall about 45 bps within six months.

US Dollar Trends

During global panic, the USD acts as the second most important safe-haven after US Treasuries. Investors sell risk assets and emerging market currencies, converting to USD, which causes the dollar to appreciate. Additionally, when stock declines trigger deleveraging, investors need to unwind dollar loans, further boosting USD demand.

Gold as a Hedge

Gold, a traditional safe-haven asset, is highly sought during stock crashes and confidence collapses. If US stocks fall alongside expectations of Fed rate cuts, gold benefits from “risk-off + falling interest rates.” Conversely, if declines occur early in a rate hike cycle, higher interest rates may suppress gold’s appeal.

Commodities’ Dilemma

Stock declines often signal economic slowdown or recession, reducing demand for industrial raw materials like oil and copper. Consequently, oil and copper prices usually fall with stocks. However, if declines are driven by geopolitical supply disruptions (e.g., war among oil-producing nations), prices may rise against the trend, creating a “stagflation” pattern.

Cryptocurrencies’ Correlation

Although some call Bitcoin “digital gold,” recent performance aligns more with high-risk assets like tech stocks. During US stock crashes, investors often sell cryptocurrencies to raise cash or offset losses, causing crypto assets to generally decline sharply along with equities.

Chain Reactions in Taiwan Stock Market

Historical data clearly shows a high correlation between US stocks and Taiwan stocks. The severe volatility in US markets impacts Taiwan through three main channels:

Sentiment Panic Spillover

As a global investment barometer, US stocks’ plunge immediately triggers collective panic among investors worldwide. During risk-off periods, investors sell risk assets including Taiwan stocks. The COVID-19 pandemic in March 2020 is a prime example, with Taiwan stocks dropping over 20% in a short period.

International Capital Outflows

Foreign investors are key participants in Taiwan’s stock market. When US markets fluctuate or decline sharply, to meet liquidity needs and reallocate assets, international investors often withdraw from emerging markets including Taiwan, exerting selling pressure.

Fundamental Economic Linkages

The US is Taiwan’s most important export market. US recession directly reduces demand for Taiwanese exports, especially impacting the tech and manufacturing sectors. Deteriorating corporate earnings expectations eventually reflect in stock prices; the 2008 financial crisis exemplifies this.

How Should Investors Prepare in Advance?

Every major US stock decline is traceable. When monitoring news and financial data daily, investors should focus on these four aspects to anticipate market changes:

Healthy Economic Signals

GDP growth, employment data, consumer confidence, and corporate earnings are key indicators of economic health. Good data support stock gains; poor data may trigger declines.

Federal Reserve Monetary Policy Trends

Rising interest rates increase borrowing costs, potentially suppressing consumption and investment, pressuring stocks; falling rates have the opposite effect. Fed signals are often priced in before the market reacts.

Geopolitical and Trade Policy Changes

International conflicts, political events, and tariff policies directly influence investor sentiment and market direction. The 2025 tariff escalation is a recent example of how trade policy can trigger market turbulence.

Investor Sentiment and Market Expectations

Optimistic outlooks boost stocks; anxiety or panic lead to sell-offs. Shifts in investor psychology often precede market turning points.

These factors interact within a complex market ecosystem. Policy changes influence economic data, which in turn affect sentiment, ultimately causing stock volatility. Investors need to understand these forces’ interplay comprehensively.

How Retail Investors Should Respond During US Stock Volatility

In the face of sharp corrections in US stocks and the resulting Taiwan stock fluctuations (e.g., over 20% drop in Taiwan stocks in March 2020, or the rate hike signals in April 2022), investors should stay alert and adopt proactive risk management:

Defensive Asset Allocation

Moderately reduce risk assets like stocks, while increasing cash reserves and high-quality bonds. This rebalancing strategy preserves participation in market rallies while providing buffers during declines.

Protective Use of Derivatives

For knowledgeable investors, cautiously employing options such as puts can establish “protective put” strategies, offering clear downside protection. These hedging tools can serve as shields during market turbulence.

Psychological Preparedness and Long-Term Perspective

Market volatility is normal. Historically, every major US stock decline has been followed by rebounds and new highs. Maintaining discipline and avoiding panic decisions are often the most effective long-term strategies.