U.S. stocks fell, will the Taiwan stock market definitely follow? An in-depth analysis of the truth behind global stock market linkages

US stock market fluctuations often trigger a chain reaction in the Taiwan market, but is this “synchronous decline” really inevitable? The answer is more complex than you think. This article uses historical data and market mechanisms to clarify the true impact of a major US stock decline on Taiwanese stocks, bonds, gold, and other assets, as well as how investors should respond.

From History: The Destructive Power of Major US Stock Market Drops

Every crash in the US stock market has identifiable patterns. Let’s review some typical cases:

The Great Depression of 1929: The Dow Jones Industrial Average plummeted 89% over 33 months, rooted in excessive leverage trading and deteriorating economic fundamentals. The introduction of trade protectionist policies further triggered a global trade contraction, eventually evolving into a worldwide economic crisis.

Black Monday of 1987: A single-day drop of 22.6%, caused by uncontrolled algorithmic trading. Institutional investors sold off simultaneously, creating a stampede effect and leading to a liquidity crisis. The Federal Reserve injected funds afterward, and the market recovered within two years.

2000-2002 Internet Bubble: Nasdaq fell from 5133 points to 1108 points, a 78% decline. Overvalued internet companies with no profits burst after the rate hike cycle began.

2007-2009 Subprime Mortgage Crisis: The housing bubble and risks from financial derivatives spread, with the Dow dropping from 14,279 to 6,800 points, a 52% decline. The global financial system was hit hard, and unemployment soared to 10%.

2020 COVID-19 Shock: The pandemic caused economic shutdowns, with the Dow falling over 30% in the short term. However, the Federal Reserve’s quantitative easing quickly reversed the situation, and within half a year, the market not only recovered lost ground but also hit record highs.

2022 Rate Hike Bear Market: The Fed raised interest rates by 425 basis points throughout the year to combat 40-year high inflation, with the S&P 500 dropping 27% and Nasdaq falling 35%. Yet, by 2023, US stocks hit new all-time highs again.

April 2025 Trade Shock: Adjustments in trade policies caused the three major indices to fall more than 10% over two days, marking the most severe consecutive decline since March 2020.

Deep Causes of Major US Stock Market Declines

Studying these events reveals a pattern: Major declines are often preceded by serious bubbles, with policy shifts or external shocks acting as triggers.

Bubble Expansion: Asset prices become severely detached from fundamentals. Whether it’s the leverage-driven trading of 1929, the overvaluation of internet stocks in 2000, or the excessive real estate expansion in 2007, these are the root causes.

Policy Shifts: Rising interest rates, tightening policies, or trade restrictions can be the final straw. When the Fed hikes rates or governments tighten liquidity, investors’ risk appetite immediately drops.

External Shocks: Geopolitical events, pandemics, energy crises, and other sudden factors can quickly trigger panic, accelerating declines.

Liquidity Crises: When institutional investors unwind positions simultaneously and deleverage, a stampede effect can occur, causing declines to exceed expectations.

How Do Other Assets React During Major US Stock Declines?

A sharp drop in US stocks usually triggers a “flight to safety,” where funds flow from high-risk assets to low-risk assets, impacting other financial assets systemically.

Bond Trends: During significant stock declines, risk awareness rises, leading to large inflows into US Treasuries, pushing bond prices up and yields down. Historical data shows that whether during bull market corrections or bear market reversals, US Treasury yields tend to fall by about 45 basis points over the next six months. However, if the decline is driven by hyperinflation (like rate hikes in 2022), an initial “stock-bond double whammy” may occur until focus shifts from inflation to recession risks.

US Dollar Strength: During global panic, the dollar acts as the ultimate safe haven. Investors sell emerging market assets to buy dollars, pushing the dollar higher. Additionally, in deleveraging waves, investors need to repay dollar-denominated loans, creating significant dollar buying pressure.

Gold Rises: Gold, a traditional safe-haven asset, is usually favored during stock market crashes. If rate cuts are also expected, gold benefits from dual tailwinds (safe-haven demand + lower interest rates). Conversely, if declines occur during initial rate hikes, higher rates may suppress gold’s attractiveness.

Commodities Under Pressure: Oil, copper, and other industrial raw materials often decline along with stocks due to economic slowdown reducing demand. However, if the decline stems from geopolitical supply disruptions (e.g., conflicts among oil-producing countries), oil prices may rise countercyclically, creating stagflation.

Cryptocurrencies Also Decline: Although some supporters call Bitcoin “digital gold,” recent market behavior shows cryptocurrencies are more akin to high-risk tech stocks. During US stock crashes, investors tend to sell crypto assets for cash, leading to synchronized declines.

Does a US Stock Market Drop Always Mean Taiwan Stocks Will Fall? The Reality Is More Complex Than You Think

This is a common misconception among many Taiwanese investors. While a US stock decline can impact Taiwan stocks, it is not an absolute certainty.

Three Transmission Mechanisms from US Stocks to Taiwan Stocks

Sentiment Spillover: As a global investment barometer, a sharp US stock decline immediately triggers panic. Investors tend to sell risk assets like Taiwanese stocks simultaneously, creating panic selling pressure. For example, during the global outbreak of COVID-19 in March 2020, Taiwan stocks fell over 20%, reflecting this sentiment contagion.

Foreign Capital Outflows: Foreign investors are key participants in Taiwan stocks. When US markets fluctuate significantly, international investors often withdraw funds from emerging markets like Taiwan to meet liquidity needs or reallocate assets, directly impacting stock prices.

Economic Fundamentals: The US is Taiwan’s most important export market. An economic recession in the US directly reduces demand for Taiwanese exports, especially in tech and manufacturing sectors. Deteriorating corporate earnings expectations will eventually reflect in stock prices. During the 2008 financial crisis, Taiwan stocks declined along with US stocks, with worsening fundamentals playing a significant role.

But There Are Exceptions

However, not every US stock decline leads to a synchronized drop in Taiwan stocks. Sometimes, Taiwan stocks may even rise against the trend:

• When the US decline is due to specific industry issues (not a systemic recession), Taiwan stocks might remain stable because of independent fundamentals.
• If Taiwan’s exports are diversified across different regions or product cycles are offset, the impact can be partially mitigated.
• Supportive policies from the central bank or government can stabilize market sentiment and slow declines.

The key is understanding the root cause of the decline. The systemic risk from the 2020 pandemic caused a global economic standstill, making Taiwan stocks vulnerable. But during minor US stock fluctuations in 2015, Taiwan stocks behaved relatively independently.

How to Detect Early Signals of a US Stock Market Crash?

Instead of passively waiting for a crash, actively monitor these key indicators:

Economic Data: GDP growth, unemployment rate, consumer confidence index, corporate earnings—good data boost stocks; poor data may trigger declines. When these indicators weaken, it’s often a risk signal.

Monetary Policy: The Federal Reserve’s rate decisions are crucial. Rate hikes increase borrowing costs, reduce consumption and investment, and pressure stocks; rate cuts have the opposite effect. Paying attention to Fed meeting minutes and policy guidance can help anticipate shifts.

Geopolitical Events: International conflicts, trade policy changes, political developments can quickly impact market sentiment. These black swan events are hard to predict but staying informed on international news enhances alertness.

Market Sentiment Indicators: Investor confidence and panic levels directly influence stock movements. The VIX index, institutional holdings changes, and margin debt are important references.

How Should Investors Respond?

Asset Allocation Adjustment: When risk signals appear, moderately reduce stock holdings and increase cash and high-quality bonds. This is not about complete exit but proactive risk management.

Diversification: Avoid over-concentration in a single market or sector. Global diversification can balance risks—when one market declines, others may remain stable.

Regular Portfolio Review: Periodically assess whether your stocks’ fundamentals remain sound and whether adjustments are needed. Avoid making decisions out of panic.

Learn Market Mechanics: Understand the linkage between US and Taiwan markets, but don’t oversimplify to “US stocks fall, Taiwan stocks fall.” Each decline has its unique background and requires specific analysis.

Psychological Preparedness: Market volatility is normal. Historically, after every major decline, markets recover and even reach new highs. Long-term investors should not be frightened by short-term fluctuations but stick to disciplined investing.

US stock market declines can pressure Taiwan stocks, but the magnitude depends on the root cause of the decline, Taiwan’s economic situation, and policy responses. By continuously learning market signals and adjusting asset allocations, investors can protect their wealth amid volatility.