When the US Stock Market Sneezes, Does Taiwan’s Market Catch a Cold? Data Reveals the Real Correlation Between Major Indices

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Data shows that when US stocks close higher the previous day, the Taiwan stock market opens higher the next day with a probability as high as 87%.

But does this mean that simply following the US market’s mood can accurately predict the entire day’s movement of Taiwan’s major index and consistently generate profits?

The answer is far from that simple. The real linkage between the two is much more complex than the surface numbers suggest, containing specific patterns and moments of decoupling.

Key Takeaways

• The US market close has high predictive value for Taiwan’s opening direction, but intraday movement is mainly driven by domestic Taiwan factors.
• Taiwan and US stocks share the same long-term trend, but Taiwan exhibits higher volatility and is influenced by the global economy, technology supply chains, and Fed policy.
• Short-term traders should use the US market to forecast the opening but make intraday decisions based on real-time Taiwan market dynamics.
• Long-term investors can use irrational market sell-offs to dollar-cost average into high-quality assets.
• Adding US stocks to the portfolio helps diversify risk, reduce volatility, and participate in the growth of global leading companies.

Taiwan-US Stock Market Correlation: What Does the Data Say?

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The data at the beginning of this article highlights an interesting phenomenon, but to truly understand the relationship between Taiwan and US markets, we must slice the time dimension much finer. The data tells us that the relationship is not a straight line but shows a dynamic “strong-weak” correlation across different time scales.

Strong Opening Correlation: Highly Synchronized Starting Posture

Taiwan investors’ biggest concern every morning at 9:00 is usually the previous night’s US market close. This is not merely psychological but backed by data. Due to the time difference, the US close is the most important external information before Taiwan opens, and global sentiment ferments first in the US market before being transmitted to the next day’s Asian opening.

What is especially noteworthy is that market “fear” spreads far more powerfully than optimism. When the US market plunges due to major negative news, that risk-aversion sentiment almost instantly reflects in Taiwan’s opening gap-down. In contrast, a moderate US rally sometimes has a relatively mild pull on Taiwan’s opening.

Therefore, treating the US close as a highly reliable “opening wind vane” for Taiwan has considerable reference value.

Weak Intraday Correlation: Each Market Walks Its Own Path

However, once Taiwan opens, the baton of the “relay race” is handed over. The subsequent intraday movement often follows Taiwan’s own independent path. The opening correlation gradually weakens, and the dominant factors shift to more local drivers.

These local drivers include:

• Institutional Flows: Net buying/selling by foreign investors, investment trusts, and other major institutions is a key force affecting the major index.
• Government Policy: Moves by the National Financial Stabilization Fund, central bank rate decisions, or industry-specific support policies can all redirect market capital flows.
• Individual Sector News: Taiwan’s unique semiconductor and electronic component supply chains, for example, can drive related stocks and the index in a different direction even if the US market is flat.

In short, the US market determines Taiwan’s “starting posture,” but intraday stamina and direction depend far more on Taiwan’s own internal factors.

Long-Term Trend in the Same Direction, But Not Stable Coexistence

Extending the time frame to several years or even decades, the major indices of Taiwan and US markets do indeed show a “long-term same-direction” trend. Both are important parts of the global economic system and are jointly affected by global economic cycles, waves of technological innovation, and monetary policies of major central banks (especially the Fed).

However, same direction does not mean “synchronized.” Empirical analysis shows no strict “cointegration” relationship between the two, meaning they are not locked in a fixed ratio over the long term. More importantly, there is a significant difference in volatility.

By tracking representative ETFs in both markets, we find that Taiwan stocks are clearly more volatile.

This data tells us that when facing the same global shocks, Taiwan’s price swings are usually larger. This implies higher downside risk but also potentially stronger rebound momentum.

Three Key Factors Driving Index Correlation

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We already know there is correlation at the opening and in long-term trends, but this linkage does not appear out of thin air. Three powerful forces tightly connect the two markets and together compose the melody of the global market.

Technology Supply Chain: Nasdaq as the Core

Taiwan’s economic lifeline is inseparable from the technology industry, and the US Nasdaq index is the “neural center” of global tech stocks. Many Taiwan-listed Taiwan companies, especially semiconductor and electronic component manufacturers, occupy key positions in the supply chains of US tech giants such as Apple (Apple) and NVIDIA (NVIDIA).

Therefore, Nasdaq’s ups and downs directly reflect US tech sector outlook expectations. When Nasdaq surges on new tech breakthroughs or falls on weak demand, that optimism or pessimism quickly transmits to Taiwan’s supply chain partners, directly affecting related stock prices and thereby driving the overall major index movement.

Global Capital Flows: Fed Interest Rate Policy

The US Federal Reserve is regarded as the “central bank of the world,” and its rate decisions dominate global capital flows and costs. When the Fed hikes rates, the dollar strengthens and capital flows back from emerging markets to the US seeking higher returns; conversely, when the Fed cuts rates or implements QE, hot money floods into higher-risk assets, with Taiwan stocks being a major destination.

Research data reveals the direct impact of Fed policy on Taiwan stocks. During past QE periods, interesting market changes occurred:

• After the QE1 announcement, order imbalance had predictive power for subsequent stock returns.
• By QE2, the inverse relationship between returns and order imbalance became even more pronounced.

This shows that Fed monetary policy not only affects the big picture but can even alter micro-level trading behavior.

Investor Sentiment: Cross-Market Risk Resonance

Financial markets are driven not only by cold data but also profoundly by crowd psychology. Fear and greed have extremely strong contagious power and can easily cross borders to form “risk resonance” phenomena.

Historical experience shows that when major crises hit the US market, such as the 2008 subprime crisis, panic spreads rapidly. Research found that the crisis produced significant spillover effects on Asian markets including Taiwan. This wave of sentiment often hits Taiwan stocks first, causing panic selling even when Taiwan’s own fundamentals have not changed immediately. This cross-market emotional contagion is the main psychological reason why a US plunge leads to a Taiwan gap-down the next day.

Practical Investor Strategies: How to Handle the Linkage

After understanding the linkage pattern and underlying causes, the most important step is to turn this knowledge into actual investment action. Facing this complex relationship, investors should not passively follow market sentiment but instead formulate clear strategies to turn linkage into their own advantage.

Short-Term Trading: Do Not Guess Intraday Moves Solely by US Market Mood

For traders focused on short-term price differences, the key realization is: the US close is merely the “starting gun” for Taiwan’s session.

A big US rally or plunge does provide extremely high reference value for Taiwan’s opening direction that day. However, once the gun fires, where the runner heads and how far they go depends on their own strength and track conditions.

Once Taiwan opens, control of the session returns to the domestic market. Short-term traders who predict intraday moves based only on the US mood often find their forecasts inaccurate. More effective practices are:

• Watch institutional flows after the open: Foreign investors and investment trusts’ capital direction is the key force deciding intraday movement.
• Focus on key heavyweights: Independent moves in TSMC, MediaTek, and other major caps have far greater impact on the major index than overnight US sentiment.
• Stay alert to real-time local news: Domestic industry news or sudden events can reverse the session at any time.

In summary, short-term traders can use the US market to predict the open, but intraday decisions must be based on Taiwan’s own real-time dynamics.

Long-Term Investing: Use Irrational Sell-Offs for Staggered Entry

For long-term investors, market linkage actually provides an excellent accumulation opportunity. We already know fear spreads extremely fast. When the US market crashes due to non-fundamental factors (e.g., political events or pure panic), Taiwan stocks often experience “irrational sell-offs.”

This emotion-driven decline is precisely the entry window for long-term investors. Rather than worrying about short-term paper losses, view it as a chance to buy quality assets at cheaper prices.

A solid strategy is to use regular fixed-amount or variable-amount dollar-cost averaging, buying market-cap-weighted ETFs representing the broader Taiwan market during downturns.

For example, Yuanta Taiwan Top 50 ETF (0050) directly tracks Taiwan’s 50 largest companies by market cap and is an ideal vehicle for participating in Taiwan’s long-term growth. One major advantage of such ETFs is relatively low management costs — for 0050, the total expense ratio is approximately 0.36%. Disciplined investing during pessimistic periods effectively lowers the average cost over the long run.

Asset Allocation: Include US Stocks to Diversify Risk

While long-term Taiwan stock investment is a great way to share in Taiwan’s economic growth, data also shows Taiwan’s volatility is significantly higher than the US. To build a more resilient, shock-resistant portfolio, allocating a portion directly to the US market is a crucial strategy.

Directly investing in US stocks — for example, S&P 500 ETFs tracking the top 500 US companies — brings several portfolio benefits:

1. Capture growth of global leaders: Directly own shares in world-class companies like Apple, Microsoft, and Amazon.
2. Enjoy lower volatility: As shown earlier, overall US market swings are typically smaller than Taiwan.
3. Extremely low costs: US ETF competition is fierce, with expense ratios rock-bottom. For example, Vanguard S&P 500 ETF (VOO) and iShares Core S&P 500 ETF (IVV) both charge only 0.03%, keeping more returns in investors’ pockets.

Looking at the historical performance of iShares Core S&P 500 ETF (IVV), even after drawdowns in 2018 and 2022, the long-term trend remains strongly upward.

Reminder: All investments involve risk, past performance does not guarantee future results. Investment returns and principal value will fluctuate with the market, and shares may be worth more or less than their original cost when redeemed.

How to Actually Do It?

Taiwan investors have two main ways to invest directly in US stocks:

• Complex entrusted trading: Place orders through domestic brokers — convenient but usually higher transaction costs.
• Open an overseas brokerage account: Open directly with a US broker — low cost and the preferred choice for active investors.

Opening an overseas brokerage account is now very straightforward, typically involving online application, identity verification, and submission of tax forms (e.g., W-8BEN). For fund transfers, besides traditional bank wire (e.g., licensed Hong Kong banks), platforms like Biyapay can help investors handle currency exchange and fund management more efficiently, greatly simplifying the process of wiring money into overseas brokerage accounts.

In summary, the relationship between US and Taiwan stocks can be condensed into one sentence: strong opening correlation, weak intraday correlation, long-term trend in the same direction. The US market influences Taiwan’s “opening game,” but it cannot decide the “endgame.”

Smart investors should stop worrying about daily short-term volatility. Historical data shows that panic sell-offs are often the best staggered-entry opportunities for long-term investors. Rather than trying to time the market and missing rebounds, review and optimize your asset allocation, turning short-term irrational panic into a chance to accumulate quality assets.

FAQ

So when the US market sneezes, does Taiwan really catch a cold?

Yes, but only “at the opening.” The US close has extremely high predictive value for Taiwan’s next-day opening direction. However, intraday movement reverts to Taiwan’s own factors, and the correlation drops significantly.

Why is Taiwan’s reaction especially violent when the US market crashes?

Because market “fear” is far more contagious than optimism. When major negative news hits the US, global investors’ risk-aversion sentiment spreads rapidly, causing selling pressure to hit Taiwan stocks across the ocean in a short time, resulting in sharp drops.

When the US market plunges, should I sell my Taiwan stocks?

Investors should distinguish between short-term sentiment and long-term value. Irrational sell-offs triggered by non-fundamental factors are actually staggered-entry opportunities for long-term investors. Selling in panic may cause you to miss the subsequent rebound.

Is it okay to invest only in Taiwan stocks and not in US stocks?

Single-market concentration carries higher risk. Data shows Taiwan’s volatility is higher than the US. Including US stocks in asset allocation helps diversify risk, reduce overall portfolio volatility, and participate in the growth of global leading companies.