Why did the US stock market plunge today? How should investors respond to this wave of market movement?

In the global financial markets, the US stock market often serves as a barometer. Every fluctuation in it affects investors worldwide. Recently, frequent declines in US stocks have made headlines, causing many investors to feel anxious: Will this downturn continue? Is it time to enter or exit the market? This article will help you clarify your thinking from three perspectives: fundamental causes, historical experience, and coping strategies.

Why Did US Stocks Drop Today? What Are the Real Drivers Behind It

A sharp decline in US stocks is never without cause. Behind every drop are specific economic or non-economic factors driving it. To preemptively warn of risks, investors should focus on the following areas:

Economic signals are the most direct

Economic data are key indicators for judging stock market direction. When GDP growth slows or even declines, it indicates weakening economic momentum, leading to downward revisions in corporate earnings expectations, and the stock market naturally comes under pressure. Rising unemployment is also a bad sign—unemployment means reduced consumer spending power, which drags on economic growth.

A high Consumer Price Index (CPI) can trigger another concern. High inflation raises living costs, suppresses consumer spending, and more importantly, may prompt the Federal Reserve to raise interest rates. Rising rates mean higher borrowing costs, reducing the flow of capital into stocks.

The Manufacturing Purchasing Managers’ Index (PMI) is also worth watching. When PMI falls below 50, it indicates contraction in manufacturing activity, often signaling an economic slowdown and putting pressure on the stock market.

Federal Reserve policy signals are extremely critical

Interest rate policies are the Fed’s most important tool. When the Fed announces rate hikes, borrowing costs increase, and enthusiasm for investment and consumption may decline, typically pressuring stocks. Conversely, lowering rates releases liquidity and is usually positive for stocks. In September 2024, the Fed announced a 50 basis point rate cut, which temporarily boosted the stock market. Future policy moves should be closely monitored.

Geopolitical and sentiment shocks cannot be ignored

International conflicts, trade frictions, political uncertainties, and other factors can disrupt market sentiment. When investors panic, even solid economic fundamentals may not prevent significant declines. The VIX fear index is a good window into market sentiment—rising index levels indicate increasing market anxiety, and investors should be alert at such times.

What Do Historical US Stock Market Crashes Tell Us

Reviewing two landmark US stock market crashes reveals some patterns.

Lessons from the 2008 financial crisis

The 2008 subprime mortgage crisis nearly destroyed the global financial system. From late 2007 to late 2008, the Dow Jones Industrial Average fell over 33%, and the Nasdaq Composite dropped more than 40%. This crisis stemmed from internal risks within the financial system—excessive leverage, asset bubbles—that ultimately led to a credit chain breakdown, plunging the global economy into recession.

The speed of the 2020 pandemic shock

The outbreak of the pandemic demonstrated the destructive power of a black swan event. From February 19 to March 23, the Dow Jones index plummeted from 29,551 points to 18,591 points, a 37% decline in just one month. Global lockdowns nearly halted economic activity, paralyzing production and causing a sharp drop in consumer demand.

Both events prove that whether due to internal financial system issues or external shocks, they can trigger significant US stock declines. For investors, the key question is: what should be done after a big drop?

Before a US Stock Market Crash: How to Detect Warning Signs Early

The first step in forecasting is reducing information gaps. Investors should develop the habit of regularly tracking economic calendars and financial data, paying special attention to signals that could trigger a financial crisis—excessive leverage, asset prices deviating significantly from fundamentals, rising credit risks, etc.

When the market is at a high, investors might consider reducing positions or allocating some hedging tools such as bonds, gold, or safe-haven funds. Diversification is also crucial—don’t put all your eggs in one basket. Spread risk across different asset types, industries, and regions.

Many brokerage platforms provide real-time financial news, helping investors quickly access the latest market information and trading data. These are often the first sources to identify risk signals.

After a US Stock Market Crash: The Dilemma for Investors

To sell or to buy? There is no standard answer

After a market plunge, investors often face a dilemma: should they sell immediately to cut losses, or buy the dip in hopes of a rebound?

First, it’s important to recognize that predicting short-term market movements is extremely difficult. Investment decisions should be based on your long-term goals and risk tolerance, not short-term market fluctuations.

Historical data shows that markets tend to rebound after big declines. If investors panic and sell, they may miss subsequent recovery rallies. But this doesn’t mean blindly buying is the right move—there are indeed buying opportunities during sharp declines, but only if you can correctly identify stocks with genuine investment value, rather than following the herd to sell.

For different types of investors:

Long-term investors might increase their holdings after a big drop, especially in quality stocks with solid fundamentals that have been excessively sold off. However, this requires independent analysis and judgment.

Short-term traders need to pay closer attention to market dynamics and adjust strategies flexibly. For them, timely stop-losses and risk hedging may be more important than stubbornly holding positions.

Use hedging tools to manage risk

When US stocks continue to decline, if you hold long positions, you can hedge risk by shorting stock indices, such as the S&P 500, Nasdaq 100, or Dow Jones.

CFD (Contract for Difference) is a relatively easy hedging tool. Compared to options and futures, CFDs offer higher leverage (up to 200x) and lower entry barriers, suitable for small investors. When indices fall, your short positions can profit, offsetting losses in individual stocks.

But it’s important to emphasize that high leverage is a double-edged sword. Use leverage cautiously, set stop-loss levels, and avoid blindly chasing gains without considering risks.

Hedging operations are straightforward: find the index you want to short, click sell, fill in order parameters, and confirm. The key is to establish the hedge before the market drops significantly, not after it has already fallen sharply.

Final Advice: Maintain a Long-Term Perspective

No matter how short-term US stock fluctuations are, the most important principle is not to change your long-term investment goals and plans because of market volatility. Stock market rises and falls are normal market mechanisms.

In the face of a US stock market crash, investors need three things: clear investment goals, a rational mindset, and flexible strategies. By continuously learning market principles, improving risk recognition, and staying disciplined, investors can better cope with US stock volatility and ultimately achieve long-term value growth. Remember, real profits are never made from short-term swings, but from long-term steadfastness and sound investment philosophy.