The surge in U.S. stocks lasted only a day before a significant intraday plunge.

On Thursday, the three major U.S. stock indices opened high but trended downward, with losses widening in the afternoon. The Dow Jones Industrial Average, which had risen by more than 250 points at the start of the day, fell by over 740 points, or more than 1.8%, in the afternoon, dropping nearly 1,000 points, or more than 2%, from its intraday high. The S&P 500, which had risen by nearly 0.8% in the morning, fell by nearly 2% in the afternoon. The Nasdaq, which had risen by nearly 1.1% in the morning, saw its losses exceed 3% at one point in the afternoon. Ultimately, the Dow closed down by nearly 500 points, or 1.2%, the S&P fell by nearly 1.4%, and the Nasdaq fell by 2.3%. The S&P had its worst start to August since 2002.

On Wednesday, the three major indices had just risen strongly after the Federal Reserve signaled a potential interest rate cut in September, with the Nasdaq closing up by more than 2.6%, and the S&P, which rose by nearly 1.6%, both achieving their largest daily gains in five months. Why did the market plummet on Thursday?

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Commentators believe that concerns about an economic recession took the upper hand. The new batch of economic data released on Thursday certainly strengthened the market's expectations for a Federal Reserve rate cut, with swap contract pricing showing that traders have fully factored in the expectation of three rate cuts within the year. Monetary policy easing is often beneficial for U.S. companies, but the tension over the economy overwhelmed U.S. stocks. The economic data further worried investors that even if the Federal Reserve definitely cuts rates at its next meeting in September, it may be too late to avoid a recession.

The number of initial U.S. jobless claims for the week, released on Thursday, exceeded expectations by rising to 249,000, the highest in a year, with a gap of 14,000 from Wall Street's expected increase of 235,000, the largest since August last year, adding to signs of a cooling labor market. On the same day, the barometer of U.S. factory activity—the ISM Manufacturing Index for July—did not rise as economists had expected, but instead fell to 46.8, the lowest since November last year, indicating that the contraction in manufacturing activity was the greatest in eight months, further signaling weakness and sending a signal of economic contraction.

Some analysts noted that the employment sub-index in the ISM manufacturing survey fell sharply to 43.4, well below the expected 49.2, the lowest since June 2020, marking the worst performance since 2009, excluding the period of the COVID-19 pandemic. Another sub-index, new orders, was also below expectations, making the overall data even weaker. The market's initial reaction was to increase bets on rate cuts, but the evident weakness in the labor market casts doubt on whether this is beneficial for U.S. stocks.

FWDBONDS Chief Economist Chris Rupkey commented that the data released on Thursday continued to point towards an economic downturn, or even a recession. The stock market doesn't know whether to laugh or cry because, although the Federal Reserve may cut rates three times this year and the yield on 10-year U.S. Treasuries has fallen below 4.00%, the winds of recession are blowing fiercely.

Robert Pavlik, Senior Portfolio Manager at Dakota Wealth, stated that the overall U.S. stock market was affected by the weak ISM manufacturing report, which told the market that the economic situation might be worse than they expected. Moreover, Federal Reserve Chairman Powell is still on the sidelines, with no rate cuts yet, which is causing concern.

Thomas Ryan, an economist at Capital Economics, said that the further decline in manufacturing increases the risk of the U.S. economy losing momentum in the third quarter, and the plunge in the employment index will intensify concerns that the Federal Reserve's policy easing may be too late.

Commentators have noted that the U.S. unemployment level is now close to an economic recession indicator proposed by former Federal Reserve economist Claudia Sahm, known as the Sahm Rule. Wall Street Journal has previously introduced that, according to the Sahm Rule, when the three-month moving average of the U.S. unemployment rate minus the low point of the unemployment rate in the previous year exceeds 0.5%, it signifies the early stages of an economic recession in the U.S. The Sahm Rule has never failed in the past half-century, and all 11 recessions since 1950 have been confirmed by the Sahm Rule.Last week, former "Fed's third in command," William Dudley, published an article calling for a rate cut in July, warning that delaying the cut would increase the risk of recession. In his article, he pointed out that one of the reasons why Federal Reserve officials hinted that there would be no action in July is that they misunderstood the labor market and were not very concerned about the risk of unemployment rates breaking the Sumner rule. They believe that the rise in unemployment is due to rapid labor force growth, rather than an increase in layoffs. However, this logic is unconvincing. The Sumner rule accurately predicted the economic recession of the 1970s, when the U.S. labor force was also growing rapidly.

Dudley believes that historical records show that the deterioration of the labor market can create a self-reinforcing feedback loop. When it becomes increasingly difficult to find work, households will cut back on spending, the economy will weaken, businesses will reduce investments, leading to layoffs and further spending cuts. This can explain why the unemployment rate always rises sharply after breaking the 0.5% threshold of the Sumner rule.