The Secret Behind the Stock Market Crash: Analyzing Future Risks Through Historical Patterns

In the global financial markets, the U.S. stock market has always occupied a central position on the stage. Its every move not only reflects the pulse of the U.S. economy but also acts as a sensitive barometer, influencing global capital flows. However, markets are like weather—unpredictable and changing. When will a major stock market crash occur? What are the underlying causes? How will these intense fluctuations impact assets like Taiwanese stocks, gold, bonds, and others? How can investors anticipate risk signals in advance?

Forgotten Lessons: The Astonishing Stock Market Crashes in History

Looking back through history, we find that the U.S. stock market has experienced numerous dramatic crashes. Each one left deep scars and taught us valuable lessons.

The Great Depression of 1929 saw the Dow Jones Industrial Average plummet 89% over 33 months, becoming one of the darkest chapters in financial history. Excessive speculation, high leverage trading, deteriorating economic fundamentals, and chaotic trade policies culminated in a global economic catastrophe. It took 25 years for the market to recover from this disaster.

Black Monday in 1987 is a warning about algorithmic trading. On that day, the Dow plunged 22.6% in a single day, and the S&P 500 tumbled 34%. Institutional investors’ “portfolio insurance” strategies triggered collectively during the sudden market decline, causing a terrifying chain of sell-offs. Coupled with aggressive rate hikes by the Federal Reserve earlier, liquidity dried up instantly, plunging the market into panic. Fortunately, the Fed intervened in time with liquidity injections, allowing the market to recover within two years. This event also led to the creation of the current circuit breaker mechanism.

The Dot-com Bubble Burst (2000–2002) wiped out hundreds of thousands of investors. The Nasdaq index fell from its peak of 5133 to 1108, a decline of 78%. At that time, valuations of internet companies were completely detached from reality; many firms were unprofitable yet traded at sky-high prices. The Fed’s rate hikes eventually burst this massive bubble, and it took Nasdaq 15 years to regain its previous high.

The 2007–2009 Subprime Mortgage Crisis triggered the most severe financial storm of the 21st century. The Dow dropped from 14,279 to 6,800, a 52% decline. The U.S. housing bubble burst, and the subprime mortgage crisis spread. Complex derivatives packaged by banks plummeted in value, and Lehman Brothers’ bankruptcy intensified the crisis. The resulting global financial tsunami pushed unemployment to 10%, and U.S. stocks only fully recovered by 2013.

The COVID-19 Pandemic Shock in 2020 struck suddenly and fiercely. In March, the stock markets experienced multiple circuit breakers, with all three major indices—Dow, S&P 500, Nasdaq—plummeting. The Dow fell over 30% in a short period. The pandemic-induced economic standstill, supply chain disruptions, and rising unemployment cast a shadow of panic over markets. However, swift intervention by the Federal Reserve and large-scale fiscal stimulus enabled the S&P 500 to not only recover losses within six months but also hit record highs.

The 2022 Rate Hike Bear Market marked the end of the era of prolonged easing. The CPI soared to 9.1%, a 40-year high, prompting the Fed to launch its most aggressive rate hike cycle ever, raising interest rates seven times in a year for a total of 425 basis points. The S&P 500 fell 27%, and Nasdaq declined 35%. Only in 2023, as the rate hike cycle neared its end and AI investment enthusiasm surged, did U.S. stocks regain strength and reach new highs.

The Trump Tariff Wave of April 2025 again reminded markets of the power of geopolitical and trade policies. On April 4, the three major indices collectively dropped over 5% in one day, with two-day declines exceeding 10%, marking the most severe consecutive declines since March 2020. Although markets gradually recovered afterward, the threat of escalating tariffs still lingers.

The Fundamental Causes of Stock Market Crashes: Bubbles and Triggers

Analyzing these historical events reveals a pattern: Before every major crash, the market had accumulated severe asset price bubbles, with stock prices far detached from economic fundamentals. Bubbles themselves do not cause crashes immediately; the real trigger is often a policy shift or external shock.

Excessive leverage, irrational optimism, and regulatory failures are common causes of bubble expansion. When the Fed begins to raise interest rates, geopolitical tensions escalate, or major companies face crises, bubbles tend to burst. History shows us that it’s not a question of “if” but “when.”

How Stock Market Crashes Affect the Global Economy: Chain Reactions in Taiwanese Stocks, Gold, Bonds, and Cryptocurrencies

When U.S. stocks plunge, they typically trigger a “flight to safety,” with capital rapidly flowing from risk assets into safe-haven assets.

U.S. Treasuries and Long-term Bonds are the first beneficiaries. During stock declines, risk aversion rises, and investors withdraw funds from equities into bonds, pushing bond prices higher and yields lower. On average, U.S. bond yields tend to decrease about 45 basis points within six months after a stock market crash. However, if the crash is driven by runaway inflation (like in 2022), initial phases may see a “stock and bond sell-off.” But when concerns shift from inflation to recession, bonds regain their safe-haven appeal.

The U.S. Dollar is the second most important safe-haven currency after Treasuries. Global investors sell higher-risk emerging market assets to buy dollars for protection. Additionally, during deleveraging caused by stock declines, investors need to unwind dollar-denominated loans, creating strong dollar buying pressure and further appreciating the USD.

Gold, as a traditional safe asset, usually rises during stock crashes. Investors buy gold to hedge against uncertainty. If markets also expect the Fed to cut interest rates, gold benefits from both safe-haven demand and falling rates. Conversely, if a crash occurs early in a rate-hike cycle, higher interest rates can weaken gold’s appeal.

Commodities like oil and copper often decline with stocks due to recession fears reducing industrial demand. However, if a crash is caused by geopolitical events like oil-producing countries’ conflicts disrupting supply, oil prices may rise counter-cyclically, creating stagflation.

Cryptocurrencies, despite being touted as “digital gold” by some supporters, tend to behave more like high-risk tech stocks. During stock crashes, investors often sell cryptocurrencies to raise cash, causing prices to fall sharply.

Taiwanese stocks are highly correlated with U.S. markets and face triple impacts. First, direct contagion—U.S. market declines immediately trigger panic among global investors, leading to synchronized sell-offs in Taiwanese stocks and other risk assets, as seen during the COVID-19 crisis in March 2020. Second, the power of foreign capital withdrawal is significant. Foreign investors are key players in Taiwan’s stock market; during volatility, they often withdraw funds from emerging markets to meet liquidity needs, putting pressure on Taiwanese stocks. The deepest impact comes from real economy linkages—U.S. economic downturns directly reduce Taiwan’s export demand, especially in tech and manufacturing sectors. Falling corporate earnings expectations eventually reflect in stock prices, as evidenced during the 2008 financial crisis.

How to Smell Risk Signals Before a Crash

To be a savvy investor, you must learn to identify risks early. Here are key areas to monitor regularly:

Economic Data are primary indicators of economic health. GDP growth, employment figures, consumer confidence, and corporate earnings—when these indicators turn positive, stocks tend to rise; when they weaken, the opposite occurs. The key is to spot turning points in these data.

Federal Reserve’s Monetary Policy directly influences market liquidity and financing costs. Rate hikes increase borrowing costs, suppress consumption and investment, and typically pressure stocks; rate cuts do the opposite. Watching Fed chairman’s statements and policy meetings can provide early signals of policy shifts.

Geopolitical and Trade Policies may seem distant but can instantly impact market sentiment. International conflicts, tariff changes, and trade war escalations can trigger panic. The 2025 Trump tariff policy rollout is a vivid example.

Market Sentiment Shifts are often the earliest warning signs. Investor confidence indices, market volatility (VIX), and margin debt levels reflect real market psychology. When optimism turns to panic, a major decline is often near.

Strategies for Investors

In the face of cyclical market fluctuations, investors should take proactive measures rather than passively endure.

Asset Allocation Adjustments serve as the first line of defense. When signs of overheating appear, moderately reduce exposure to stocks and risk assets, and increase holdings of cash and high-quality bonds. This allows participation in gains while protecting against sharp declines.

Portfolio Risk Management can involve prudent use of derivatives for knowledgeable investors. Establishing “protective puts” or similar strategies provides clear downside protection for holdings—like insuring your portfolio.

Stay Informed and Sensitive to market signals. Unhealthy economic data, Fed policy hints, geopolitical conflicts, and shifts in investor sentiment require daily attention. Information gaps are often the root cause of investment failures.

Psychological Preparedness is equally important. Market volatility is normal; panic-driven decisions often worsen losses. Preparing mentally and having a plan in advance helps maintain rationality during downturns.

Although history does not repeat exactly, it often rhymes. By studying each past crash, investors can better understand market dynamics and respond calmly when the next storm arrives.