Why did the US stock market plunge today? How should investors respond?

In the global financial markets, the US stock market has always been at the center. Every sharp fluctuation in US stocks can trigger the nerves of investors worldwide, especially during significant declines, when investment decisions often become more complex and challenging.

The Core Drivers Behind the US Stock Market Plunge

To stay rational amid volatility, it is essential to understand the real factors causing the decline in US stocks. These factors are generally categorized into several dimensions:

Economic Fundamentals are the most direct influencing factors. When GDP growth slows, unemployment rises, and the Consumer Price Index (CPI) remains high, corporate profit expectations decline, naturally putting pressure on stock valuations. In September 2024, the Federal Reserve announced a 50 basis point rate cut, which was a market response to slowing economic growth. Investors should continuously monitor monthly economic data releases, especially signals of recession such as the Manufacturing Purchasing Managers’ Index (PMI) falling below 50.

Monetary Policy Shifts are equally impactful. The Federal Reserve’s interest rate decisions directly affect the cost of capital and investment return expectations. In a high-interest-rate environment, growth-oriented tech stocks are hit hardest.

Geopolitical Conflicts and Market Sentiment Fluctuations should not be overlooked. Investors can track market fear levels in real-time through the VIX volatility index—when VIX rises, caution should be heightened accordingly.

Lessons from Historical Market Crashes

The 2008 Financial Crisis saw the collapse of the subprime mortgage market, triggering a global credit crunch. From late 2007 to late 2008, the Dow Jones Industrial Average fell over 33%, and the Nasdaq Composite declined more than 40%. Many assets considered “safe” suddenly turned into bubbles.

The COVID-19 Pandemic Shock was even more sudden. Between February 19 and March 23, the Dow dropped from 29,551 points to 18,591 points, a decline of 37%. The global economy instantly ground to a halt.

Both events demonstrate that whether due to internal systemic collapse or external black swan events, the US stock market cannot remain immune. Equally important is that markets tend to rebound after these major declines.

Risk Warnings and Information Management Before a Crash

Reducing information asymmetry is crucial. Investors need to establish their own information channels, regularly follow economic calendars, economic data releases, Federal Reserve meeting minutes, and policy statements. Special attention should be paid to risk signals such as:

• Excessive leverage: signs of borrowing booms in the market
• Asset bubbles: valuations in certain sectors diverging from fundamentals
• Credit risk: sharp rises in corporate bond yields and increasing default rates

When these signals appear, investors should consider actively reducing their positions or allocating defensive assets such as bonds, gold, or low-volatility funds. Diversification—across different asset classes, sectors, and regions—is a classic method to reduce single-point risks.

Decision-Making Framework During a Crash: Sell or Buy?

There is no absolute answer; decisions must be based on individual long-term investment goals and risk tolerance.

Selling logic: Lock in losses and avoid further risks. However, historical data shows that this often causes investors to miss out on rebound gains.

Buying logic: Falling stock prices imply that future earnings are undervalued, and the cost basis for quality companies is lower. But this requires investors to have sufficient analytical skills and not be swayed by market panic.

A balanced approach—hedging strategies—are more suitable in uncertain environments. This involves shorting stock indices (such as S&P 500, Nasdaq 100, Dow Jones) to hedge the risk of spot positions. Contracts for Difference (CFDs), with their high leverage (up to 200x) and low entry barriers, are popular tools for retail investors. When US stocks decline, shorting CFDs on indices can effectively offset spot losses.

Key tip: Leverage is a double-edged sword; use it cautiously and set proper stop-loss points.

Strategies for Long-Term Investors vs. Short-Term Traders

Long-term investors should update their investment lists during major declines, seeking high-quality assets that are oversold but fundamentally sound, and build positions gradually. This requires independent thinking and strong psychological resilience.

Short-term traders and hedgers should closely monitor short-term market dynamics, adjust positions flexibly, and use derivatives for dynamic hedging when necessary.

Summary: Staying Rational Amid Volatility

Regardless of how the market evolves, three points are critical:

1. Stick to your long-term investment plan and avoid being driven by short-term fluctuations
2. Establish a rational decision-making framework based on data rather than emotions
3. Utilize hedging tools flexibly to find certainty amid uncertainty

Market rises and falls are normal. By continuously learning market laws, accumulating investment experience, and optimizing strategic frameworks, investors can achieve genuine value returns over the long term.