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The surge in U.S. stocks lasted only one day before they plunged during trading.

On Thursday, the three major U.S. stock indexes opened high and fell, turning to decline in the morning and widening the decline in the afternoon. The Dow Jones Industrial Average, which had risen by more than 250 points at the beginning of the session, fell by more than 740 points in the afternoon, a drop of more than 1.8%, and fell by nearly 1,000 points from the intraday high, a drop of more than 2%. The S&P 500, which had risen by nearly 0.8% in the morning, fell by nearly 2% in the afternoon. The Nasdaq rose by nearly 1.1% in the morning and fell by slightly more than 3% in the afternoon. In the end, the Dow Jones Industrial Average closed down nearly 500 points, a drop of 1.2%, the S&P closed down nearly 1.4%, and the Nasdaq closed down 2.3%. The S&P had its worst start to August since 2002.

This Wednesday, the three major stock indexes rose strongly after the Federal Reserve signaled that it might cut interest rates in September. The Nasdaq closed up more than 2.6%, and together with the S&P 500, which rose nearly 1.6%, they both recorded their largest daily gains in five months. Why did they plummet during trading on Thursday?

Commentators believe that concerns about a recession have prevailed. A new batch of economic data released on Thursday certainly strengthened market expectations for the Fed to cut interest rates, and swap contract pricing showed that traders had fully digested expectations of three rate cuts this year. Loose monetary policy is often good for American companies, but nervousness about the economy has overwhelmed U.S. stocks. The economic data has made investors more worried that even if the Fed is sure to cut interest rates at its next meeting in September, it will be too late to avoid a recession.

The number of first-time applications for unemployment benefits in the United States last week, released on Thursday, exceeded expectations and increased to 249,000, a one-year high. The gap with Wall Street's expectation of an increase of 235,000 was the largest since August last year, adding to signs of a cooling labor market. The ISM manufacturing index, a barometer of U.S. factory activity, released on the same day, did not rebound in July as economists expected, but instead fell to 46.8, a new low since November last year, meaning that the contraction of manufacturing enterprise activities was the largest in eight months, further showing weakness and sending a signal of economic contraction.

Some analysts said that the employment sub-index in the ISM manufacturing survey fell sharply to 43.4, far below the expected 49.2, hitting a new low since June 2020, which is the worst performance since 2009 excluding the COVID-19 period. Another sub-index, new orders, was also lower than expected, making the overall data even weaker. The market's initial response was to increase bets on interest rate cuts, but it is doubtful whether the obvious weakness in the labor market is beneficial to US stocks.

Chris Rupkey, chief economist at FWDBONDS, commented that the data released on Thursday continued to move in the direction of economic downturn and even recession. The stock market doesn't know whether to laugh or cry, because although the Federal Reserve may cut interest rates three times this year and the yield on 10-year U.S. Treasury bonds has fallen below 4.00%, the wind of recession is blowing fiercely.

Robert Pavlik, senior portfolio manager at Dakota Wealth, said that the overall U.S. stock market was affected by the weak ISM manufacturing report, which told the market that the economic situation may actually be worse than they expected. And the Federal Reserve Chairman Powell is still on hold and has not cut interest rates, which makes them worried.

Thomas Ryan, an economist at Capital Economics, said a further decline in manufacturing increased the risk that U.S. economic growth lost momentum in the third quarter, while the plunge in the employment index would heighten concerns that it was too late for the Federal Reserve to ease policy.

Some commentators said that the unemployment level in the United States is now close to an economic recession indicator proposed by former Federal Reserve economist Claudia Sahm, known as the Sahm Rule. Wall Street Journal once introduced that according to the Sahm Rule, when the three-month moving average of the US unemployment rate minus the low point of the previous year's unemployment rate exceeds 0.5%, it marks the beginning of the US economic recession. The Sahm Rule has never failed in the past half century, and all 11 economic recessions since 1950 have been confirmed by the Sahm Rule.

Last week, William Dudley, former third-in-command of the Federal Reserve, issued an article calling for a rate cut in July, warning that delaying the cut would increase the risk of a recession. In his article, he pointed out that one reason why Fed officials hinted that they would not take action in July was that they misunderstood the labor market and were not very worried about the risk of the unemployment rate breaking the Sam rule. They felt that the rise in unemployment was due to the rapid growth of the labor force, not the increase in layoffs. This logic is not convincing. The Sam rule accurately predicted the economic recession in 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 will produce a self-reinforcing feedback loop. When jobs become harder to find, households will cut spending, the economy will weaken, and companies will reduce investment, leading to layoffs and further spending cuts. This can explain why the unemployment rate always rises sharply after breaking through the 0.5% threshold of Sam's rule.