Why did the US stock market plunge today? Should investors sell or buy the dip?

The US stock market, as a barometer of the global capital markets, directly influences investor confidence worldwide. From the 2008 financial crisis to the 2020 pandemic shock, significant adjustments in US stocks often reflect deep changes in economic fundamentals. Currently, markets are experiencing frequent volatility, and many investors face the same dilemma: Why did US stocks plunge today? What signals are hidden behind this? In the face of decline, should you cut losses or position strategically?

The Core Drivers Behind the US Stock Market Plunge

Every major decline in US stocks has its internal logic. Understanding these trigger factors is essential for making informed investment decisions.

Worsening Economic Data Is the Primary Signal

Slowing or negative GDP growth usually indicates recession risk. Rising unemployment suggests a weakening labor market and declining consumer spending power. When the Consumer Price Index (CPI) surges, purchasing power is eroded, and corporate margins come under pressure. A Manufacturing Purchasing Managers’ Index (PMI) below 50 is a clear sign of manufacturing recession. These data points are not isolated numbers but part of an interconnected warning system.

Central Bank Policy Shifts Have the Most Direct Impact on Asset Valuations

Every decision by the Federal Reserve is a market watershed. Rising interest rates increase borrowing costs, weakening consumption and investment, and reducing stocks’ relative returns. Although the September 2024 rate cut of 50 basis points was initially positive, market divergence over subsequent policy paths often triggers intense volatility. Investors should closely monitor the November FOMC meeting, which could be a key turning point for Q4 trends.

Geopolitical Conflicts and Political Uncertainty

Frequent international conflicts, trade policy changes, and escalating geopolitical risks can trigger risk aversion among investors. In a globalized context, distant conflicts can impact US corporate profits through supply chains, energy prices, and other channels.

Self-Reinforcing Market Sentiment

The VIX fear index directly reflects investor sentiment. When the fear index rises, institutional selling can further push stock prices down, creating a vicious cycle of panic. During such periods, rational decision-making is often overwhelmed by emotion.

Lessons from History

Reviewing two landmark US stock market crashes reveals two main root causes—fragile financial systems and external shocks.

2008: The Self-Destruction of the Financial System

The subprime mortgage collapse acted like a landmine detonating within the financial system. From late 2007 to late 2008, the Dow Jones Industrial Average fell over 33%, and the Nasdaq Composite declined more than 40%. Defaults by banks and financial institutions triggered a global credit freeze, ultimately leading to a worldwide recession. This crisis taught us that systemic risk often originates from seemingly safest sectors.

2020: The Sudden Arrival of a Black Swan Event

Within just a month from mid-February to late March, the Dow plunged from 29,551 points to 18,591, a 37% drop. Global lockdowns paralyzed production, consumer demand collapsed, and the US economy faced unprecedented shocks. However, this crisis also demonstrated the rapid response capabilities of governments and central banks—massive liquidity injections followed, and markets rebounded strongly in the following year.

These cases reveal a truth: major declines are often releases of pressure, not the end.

How to Predict a US Stock Market Drop?

Information Asymmetry Is the Lifeline of Investment

Opaque information always leaves investors playing catch-up. Building an efficient information acquisition system is crucial—tracking economic calendars, paying attention to central bank speeches, monitoring geopolitical events, and observing industry trends. Many brokerage platforms now provide real-time financial news, categorizing information, data, and trading insights to help investors quickly identify key signals amid the flood of information.

Identify Bubbles and Risk Accumulation

At market highs, caution is needed regarding excessive leverage, asset bubbles, and credit risks—precursors to financial crises. When valuations deviate significantly from fundamentals, financing costs are high, and credit spreads widen, these are often signals to reduce holdings.

Build a Defensive Investment Portfolio

At market peaks, consider increasing allocations to safe-haven assets like bonds and gold, or diversify investments to reduce single-asset risks. Holding assets across different industries and regions can provide buffers when specific sectors come under pressure.

What to Do After a US Stock Market Drop?

To sell or to buy—that depends on your fundamental judgment

There is no one-size-fits-all answer; everything depends on individual investment goals and risk tolerance.

Risks of Selling: Panic selling often occurs at market lows. Historical data shows that most major declines are followed by significant rebounds within 12 months. Selling at the bottom risks missing the rebound, and the opportunity cost often exceeds the unrealized losses on holdings.

Opportunities to Buy: Falling stock prices effectively increase expected returns. For fundamentally solid companies that are excessively sold off, a major decline can be a good opportunity for low-cost accumulation. This requires investors to have independent research capabilities and not be swayed by market emotions.

Practical Recommendations:

• If your investment horizon is over 3 years and the fundamentals of your holdings remain intact, a decline can be an opportunity to add positions.
• If uncertain about the market direction, consider staggered buying or partial selling to reduce risk.
• If you cannot psychologically tolerate unrealized losses, moderate stop-loss is wiser than forced liquidation.

Use hedging tools to lock in risks

When unsure whether US stocks will continue to fall, hedging tools can protect your investments. Options, futures, and Contracts for Difference (CFDs) can be used to short and hedge long positions.

Advantages of CFD Hedging: Compared to options and futures, CFDs offer higher leverage (up to 200x) and lower trading barriers. When indices like the S&P 500 or Nasdaq 100 decline, shorting CFDs on these indices can amplify hedge gains, offsetting individual stock losses.

Hedging Execution Logic: During periods when your stock portfolio is passively under pressure, establishing short CFD positions on indices can generate gains when the index falls, partially or fully offsetting stock losses. This strategy suits investors who want to retain long-term holdings while protecting capital during short-term volatility.

But remember: High leverage also means high risk. Excessive leverage can cause significant losses if the market moves against your position, so position sizing and stop-loss settings are essential.

Final Advice

When facing volatility in US stocks, the most common mistake is being misled by short-term fluctuations and abandoning long-term investment goals. Market rises and falls are normal cycles; what matters is maintaining a clear investment logic and psychological resilience.

Successful investors need three elements: clear goals, rational mindset, and flexible strategies. By continuously learning about market operation principles, investors can gradually improve decision quality amid volatility and ultimately achieve long-term asset growth.