The Truth Behind the Sharp Drop in US Stocks: Historical Patterns, Market Chain Reactions, and Retail Investors' Self-Help Guide

The status of U.S. stocks in the global financial markets is unshakable, and every sharp fluctuation will stir waves in the global capital markets. As a market barometer, a significant decline in U.S. stocks often indicates the concentrated release of market risks. But what are the true driving forces behind these declines? How do they transmit to bonds, gold, commodities, and cryptocurrencies? How can ordinary investors detect signals in time before a crash? This article, through historical review and in-depth analysis of market logic, reveals the true face of stock market plunges.

From history to identify patterns: Seven landmark events of major U.S. stock declines

Investors often say “history repeats itself,” and the major declines in U.S. stocks over the years indeed follow certain similar logic. Here are some of the most representative ones in the past century:

1929-1933 Great Depression: An extreme case of market out of control

This is the most devastating stock market crash in history. The Dow Jones Industrial Average plummeted 89% over 33 months, triggering a global economic crisis, soaring unemployment, and a market that took 25 years to recover. The root causes were excessive speculation, uncontrolled leverage trading, and worsening economic fundamentals, with uncertain trade policies adding fuel to the fire.

1987 “Black Monday”: A warning of uncontrolled algorithmic trading

A single-day drop of 22.6%, with the S&P 500 falling 34%. This event was unique because it was triggered by uncontrolled algorithmic trading—overvalued markets combined with rapidly rising interest rates, causing a chain reaction of automatic sell orders. After the Federal Reserve injected liquidity urgently, the market recovered within two years. This crisis also led to the creation of circuit breakers.

2000-2002 Dot-com Bubble Burst: The cost of overvaluation

The Nasdaq soared from a high of 5133 points to 1108 points, a decline of 78%. The valuation bubble in the internet industry was completely detached from fundamentals, with many unprofitable companies going bankrupt. It took 15 years for the tech sector to regain its previous levels.

2007-2009 Subprime Mortgage Crisis: The eruption of systemic risk

The Dow Jones fell from 14,279 to 6,800 points, a decline of 52%, sparking a global financial crisis. The bursting of the housing bubble, Lehman Brothers’ bankruptcy, and chain reactions led to U.S. unemployment rising to 10%. After government rescue measures, the market took four years to fully recover.

2020 COVID-19 Pandemic Shock: An extreme test of black swan events

In March, U.S. stocks triggered multiple circuit breakers, with the Dow, S&P 500, and Nasdaq indices plunging across the board, with the Dow dropping over 30% in the short term. The pandemic caused economic shutdowns and supply chain disruptions, but thanks to timely quantitative easing by the Fed and fiscal stimulus by the government, the market not only recovered all losses within six months but also hit new highs in history.

2022 Rate Hike Bear Market: The collision of inflation and policy

CPI soared to 9.1% (a 40-year high), and the Fed aggressively raised interest rates by 425 basis points throughout the year, causing the S&P 500 to fall 27% and the Nasdaq 35%. However, the resilience of the U.S. economy, market expectations of ending rate hikes, and the emergence of AI investment trends ultimately reversed the situation in 2023, with stocks reaching new record highs.

April 2025 Trump Tariff Turmoil: Market impact of trade policy

After announcing “reciprocal tariffs,” on April 4, the Dow plunged 2,231.07 points (a 5.50% drop) in a single day, the S&P 500 fell 5.97%, and the Nasdaq dropped 5.82%. In just two days, the three major indices declined over 10% cumulatively, creating the most severe two-day decline since March 2020. Subsequently, the tariff war eased, but policy uncertainties still left hidden risks for the market.

Chain reaction of stock market declines: How other assets follow the wave

The “risk-averse mode” triggered by U.S. stock declines is not an isolated phenomenon but a coordinated response of the entire financial system. Funds accelerate flowing from high-risk assets to safe havens, which is key to understanding cross-asset performance.

Bonds: The complex evolution of dual roles

When stocks plunge, investor risk appetite diminishes, and large amounts of capital flow into U.S. Treasuries (especially long-term bonds), pushing bond prices up and yields down. Typically, U.S. bond yields decrease by about 45 basis points over the following six months.

However, there is an exception: if the decline is driven by hyperinflation (e.g., 2022), forcing the Fed to aggressively raise rates, initial reactions may be a “bond and stock sell-off”—bond prices also fall. But when market focus shifts from inflation to recession fears, bonds’ safe-haven appeal reasserts itself.

The US dollar: The ultimate safe-haven currency’s attraction

During global panic, the dollar becomes the last fortress. Investors sell emerging market assets and other high-risk currencies to buy dollars, causing the dollar to appreciate. Additionally, the deleveraging triggered by stock declines creates huge demand for dollar purchases (investors need to unwind positions and repay dollar loans), further strengthening the dollar.

Gold: The tug-of-war between safe-haven demand and interest rates

Gold is a traditional safe-haven asset. During stock crashes, investors buy gold to hedge risks, pushing up gold prices. If the market also expects the Fed to cut rates, gold faces a “double positive” (safe-haven demand + falling interest rates). But if the decline occurs during early rate hikes, higher interest rates suppress gold’s attractiveness, and government bonds perform better.

Commodities: Leading indicators of recession expectations

Stock market declines often signal slowing economic growth or recession, leading to decreased demand for industrial raw materials like oil and copper. Oil and copper prices usually move in tandem with stocks downward. The only exception is geopolitical events causing supply disruptions (e.g., wars in oil-producing countries), which can push oil prices up against the trend, creating a “stagflation” pattern.

Cryptocurrencies: The tech-stock attribute surpasses the “digital gold” halo

Although Bitcoin and other cryptocurrencies are touted by some as “digital gold,” recent performance shows they behave more like high-risk assets such as tech stocks. During stock crashes, investors tend to sell cryptocurrencies to cash out or cover losses elsewhere, causing crypto assets to generally decline sharply along with equities.

Detecting risks early: Warning signals before stock market crashes

Every major U.S. stock decline has a brewing period. If investors can systematically monitor the following four types of signals, they can improve alertness before the storm hits.

Economic data: The thermometer of fundamentals

GDP growth, employment figures, consumer confidence, corporate earnings—these indicators directly reflect economic health. Deterioration often precedes stock declines. For example, rising unemployment or declining corporate profits are risk signals.

Monetary policy: Interpreting central bank intentions

The Fed’s rate hikes or cuts directly alter borrowing costs, affecting consumption, investment, and corporate valuations. Rate hike cycles tend to depress stocks, especially high-growth tech stocks; rate cuts have the opposite effect. The key is to catch signals before policy shifts.

Geopolitics and trade policies: Breeding grounds for black swans

International conflicts, political events, trade frictions are often underestimated by markets, but once they erupt, they can quickly change investor sentiment. The 2025 Trump tariff turmoil is a typical example—sudden policy escalation triggered double-digit declines.

Market sentiment: The barometer of investor psychology

Investor panic indices (VIX), margin debt, institutional holdings—these reflect market mood. When panic indices spike and margin debt declines, it often signals a rapid contraction of risk appetite.

These factors interact: a policy shift may cause economic data to worsen, which then impacts market sentiment, ultimately leading to stock volatility. Systematic monitoring of these layers can significantly improve risk prediction accuracy.

Lessons for retail investors: How to protect yourself during major declines

The volatility of U.S. stocks is never confined to Wall Street. When stocks plunge, the impact quickly propagates through capital flows and market sentiment to other markets. During the COVID-19 pandemic in March 2020, U.S. stocks crashed, triggering global panic, with Taiwan stocks dropping over 20%; after the Fed signaled aggressive rate hikes in April 2022, U.S. stocks sharply corrected, and Taiwan stocks followed suit.

For investors facing significant U.S. stock corrections, passive waiting is often the worst choice. It’s advisable to proactively implement risk management strategies:

Active asset allocation adjustments

Moderately reduce exposure to stocks and other risky assets, increase cash reserves and high-quality bonds. When warning signals appear, preemptively shift from stocks to defensive assets to avoid suffering maximum losses passively.

Prudent use of hedging tools

Investors knowledgeable in derivatives can consider strategies like protective puts to provide clear downside protection. This is akin to buying “insurance” for your portfolio, reducing losses in extreme scenarios.

Building informational advantage

Reducing information gaps is crucial for risk management. Monitoring economic data, Fed policy shifts, international conflicts, and investor sentiment—these are essential daily tasks. Lack of information often results in discovering problems too late.

Historical patterns of U.S. stock declines teach us: volatility is normal, and risks can be identified and managed in advance. The key is to establish systematic early warning awareness and take hedging actions before risks materialize, rather than passively enduring them.