Why is the US stock market caught in a cyclical crisis? How should Taiwanese investors respond?

The direction of the U.S. stock market often serves as a barometer for the global financial markets. When dramatic fluctuations occur on Wall Street in New York, markets from emerging Asia to developed Europe are rarely spared. For Taiwanese investors, understanding the causes and chain reactions of major U.S. stock declines has become an essential lesson. This article will review those historic crashes that changed financial history, reveal the underlying logic, and help investors prepare before the next storm arrives.

Major U.S. Stock Market Crashes: From 1929 to 2025

Throughout over a century of turbulent history, several major crashes in the U.S. stock market each have their own historical background and market characteristics.

During the Great Depression of 1929, the Dow Jones Industrial Average plummeted 89% over 33 months. The root cause was excessive speculation and leverage trading that caused valuations to severely diverge from the real economy. In 1930, the U.S. Congress passed the Smoot-Hawley Tariff Act, which significantly raised tariffs on over 20,000 imported goods, exacerbating the crisis and triggering a global retaliatory trade war. This eventually led to a deep recession worldwide, with unemployment soaring, and it took the Dow 25 years to recover to pre-crash levels.

The Black Monday event of 1987 saw the Dow drop 22.6% in a single day, with the S&P 500 falling 34%. This crisis stemmed from uncontrolled algorithmic trading. At the time, institutional investors widely adopted “portfolio insurance” strategies, intending to hedge risks by automatically selling stock index futures. But when the market suddenly declined, many institutions triggered sell orders simultaneously, creating a vicious cycle that led to a liquidity crisis. The Federal Reserve injected liquidity, and within two years, markets recovered. This event also led to the creation of the famous circuit breaker mechanism.

The dot-com bubble burst from 2000 to 2002 saw the Nasdaq plunge from 5133 points to 1108 points, a decline of 78%. The late 1990s internet revolution fueled irrational market frenzy, pushing the stock prices of many unprofitable internet companies to sky-high levels. The Fed raised interest rates to cool the overheating economy, causing the bubble to burst. Many companies went bankrupt, and it took Nasdaq 15 years to regain its former ground.

The subprime mortgage crisis of 2007-2009 inflicted systemic damage on the global financial system. The bursting of the U.S. housing bubble triggered a wave of subprime mortgage defaults, leading financial institutions to bundle risks into complex derivatives that propagated worldwide. The Dow fell from 14,279 to 6,800 points, a 52% decline. Global unemployment soared to 10%, and after government intervention, markets only truly recovered by 2013.

In 2020, under the impact of the COVID-19 pandemic, the U.S. stock market experienced multiple circuit breakers, with all three major indices plunging sharply. The Dow dropped over 30% within a month. Economic activity halted, supply chains broke down, and oil prices plummeted amid multiple factors. However, the Federal Reserve’s swift quantitative easing and government fiscal stimulus reversed the trend, and the S&P 500 not only recovered lost ground within six months but also hit record highs.

During the 2022 rate hike cycle, the S&P 500 declined 27%, and Nasdaq fell 35%. To combat the highest inflation in 40 years (CPI reaching 9.1%), the Fed raised interest rates seven times throughout the year, totaling 425 basis points. The Russia-Ukraine war intensified energy and food crises, but in 2023, the AI investment boom and expectations of a policy shift by the Fed drove a strong rebound, fully recovering the bear market losses.

The Trump tariff turmoil of April 2025 was the most intense. On April 4, the Dow plunged 2,231 points (5.50%), the S&P 500 fell 5.97%, and the Nasdaq dropped 5.82%. The Trump administration announced a 10% baseline tariff on all trade partners and further tariffs on deficit countries. This radical policy far exceeded market expectations, triggering deep fears of global supply chain disruptions. Within two days, all three indices declined over 10%, marking the most severe consecutive decline since March 2020.

Common Features and Fundamental Causes of Major U.S. Stock Market Declines

Examining these historic crises reveals a recurring pattern: Asset bubbles inflate to extremes, and policy shifts or external shocks become triggers.

Excessive speculation and leverage expansion are often the first warning signs. Whether it was the credit frenzy of 1929, the tech bubble of 2000, or the housing bubble of 2007, market participants used leverage to push asset prices far beyond economic fundamentals. When market sentiment shifts from optimism to skepticism, these bubbles tend to burst violently.

Rapid shifts in monetary policy are common catalysts. The Fed’s rate hike cycles often signal the end of an overheated economy. As interest rates rise, borrowing costs increase, hitting overvalued companies hardest. The 2022 rate hike bear market and the early 2000s dot-com bust both confirm this.

Geopolitical and sudden events are uncontrollable factors. Wars, pandemics, trade conflicts—black swan events—can instantly change investor expectations, leading to panic selling.

Chain Reactions of U.S. Stock Market Crashes on Global Assets

When the U.S. stock market crashes, it triggers typical “flight-to-safety” modes, with capital flowing from high-risk assets like stocks into safer instruments.

Bond prices and yields exhibit the most inverse correlation. During stock declines, risk aversion rises, prompting large capital outflows from equities into bonds. U.S. Treasuries, as the world’s top safe-haven assets, see prices rise and yields fall. Historical data shows that within six months after a bull market correction or bear market onset, U.S. bond yields tend to decline by about 45 basis points. However, if the decline stems from inflation (e.g., 2022), initial phases may see a “double whammy” of falling stocks and bonds, but as panic shifts from inflation to recession fears, bonds regain their safe-haven role.

The U.S. dollar invariably appreciates. As the global settlement currency and ultimate safe haven, the dollar benefits during market turmoil. Investors sell risk assets to buy dollars, and deleveraging by investors needing to repay dollar-denominated loans also drives demand for USD.

Gold, as a traditional safe-haven asset, often rises in tandem. When market confidence collapses, investors buy gold to hedge against uncertainty. If a stock market decline coincides with expectations of Fed rate cuts, gold benefits from both safe-haven demand and falling interest rates. But in early rate hike phases, high interest rates can suppress gold’s appeal despite safe-haven demand.

Industrial raw materials and commodities usually decline with stocks. A crisis signals slowing economic growth, reducing demand for oil, copper, and other raw materials. However, if the decline is driven by geopolitical supply disruptions (e.g., conflicts among oil-producing nations), oil prices may rise countercyclically, creating stagflation.

Cryptocurrencies tend to behave more like high-risk assets such as tech stocks. Despite some supporters viewing them as “digital gold,” in market downturns, investors often sell cryptocurrencies to raise cash or offset losses elsewhere.

How Severe Is the Impact of U.S. Stock Market Declines on Taiwan’s Market?

Historically, the Taiwanese stock market shows high correlation with the U.S. market. Major U.S. declines impact Taiwan through three main channels.

First is direct contagion of market sentiment. As a global investment barometer, a sharp fall on Wall Street immediately triggers panic among international investors. When risk aversion rises, investors tend to sell risk assets like Taiwanese stocks and other emerging markets. The 2020 March pandemic-induced global crash is a prime example—Taiwan’s stock index fell over 20% during that period.

Second is the withdrawal of foreign capital. Foreign investors are key participants in Taiwan’s stock market. During U.S. market volatility, international investors often withdraw funds from emerging markets, including Taiwan, to meet liquidity needs or reallocate assets, exerting selling pressure on Taiwanese stocks. In 2022, when aggressive Fed rate hike signals caused turbulence, Taiwan’s stock market also experienced noticeable declines.

The most fundamental impact comes from real economic linkages. The U.S. is Taiwan’s largest export market; a U.S. recession directly reduces demand for Taiwanese exports, especially impacting the tech and manufacturing sectors. Expectations of corporate earnings decline, ultimately reflected in falling stock prices. The 2008 financial crisis exemplifies this connection.

How Can Investors Detect Early Warning Signs Before a Market Crash?

Every major U.S. stock decline is not sudden but has precursors. Investors should focus on four key types of information.

Economic data are primary indicators. GDP growth, employment figures, consumer confidence, corporate earnings—all reflect economic health. Deterioration in these signals often precede stock market downturns.

Federal Reserve monetary policy signals are crucial. Rising interest rates increase borrowing costs, weaken corporate earnings outlooks, and dampen consumption; falling rates have the opposite effect. Policy shifts often mark turning points, so investors should closely monitor Fed meeting minutes and officials’ statements.

Geopolitical risks and policy changes should not be overlooked. International conflicts, trade policy adjustments, and sudden geopolitical events can instantly alter market expectations. The 2025 Trump tariffs are a typical example.

Market sentiment indicators reflect investor psychology. The VIX volatility index, investor net positions, and other sentiment gauges reveal market optimism or pessimism. These factors interact—policy changes influence economic data, which in turn affect sentiment, ultimately causing stock volatility.

How Should Retail Investors Proactively Manage Risks During Major U.S. Stock Market Declines?

When the U.S. stock market experiences intense turbulence, this volatility inevitably impacts Taiwan’s market through capital flows and sentiment contagion. Retail investors should heighten awareness and adopt proactive risk management strategies.

Adjust asset allocation appropriately. When risk signals emerge, consider reducing exposure to stocks and other risky assets, increasing cash reserves and high-quality bonds. This approach allows participation in market rallies while maintaining flexibility during downturns.

For knowledgeable investors, prudent use of derivatives can manage risks. Establishing protective put options can provide clear downside protection, limiting potential losses.

Timely information is vital. Economic data releases, Fed policy statements, and international developments often pre-empt market shifts. Reducing information lag helps investors grasp market trends promptly and avoid reactive decisions.

In summary, understanding the cyclical nature and chain mechanisms of major U.S. stock declines, combined with active risk management, is key for retail investors to protect capital and seize opportunities in volatile markets. History does not repeat exactly, but it often rhymes—each crisis contains patterns, and investors who recognize these patterns tend to emerge with the last laugh.