What happened? U.S. stocks plunged during trading hours, with the Dow dropping nearly 1000 points at one point

The sharp rise in US stocks lasted only one day before a sharp intraday plunge.

On Thursday, the three major US stock indexes opened high and then fell, with all turning downward in the morning session and the losses widening in the afternoon. The Dow, which had risen more than 250 points in early trading, fell more than 740 points at midday, a drop of over 1.8%. It dropped nearly 1,000 points from its daily high, down more than 2%. The S&P 500, which had risen nearly 0.8% in early trading, fell nearly 2% at midday. The Nasdaq, which had risen nearly 1.1% in early trading, saw a drop of over 3% at midday. In the end, the Dow closed down nearly 500 points, a 1.2% drop, the S&P closed down nearly 1.4%, and the Nasdaq closed down 2.3%. The S&P posted its worst August start since 2002.

This Wednesday, the three major indexes had just surged after the Federal Reserve signaled a possible rate cut in September, with the Nasdaq up over 2.6% and the S&P up nearly 1.6%, marking the largest daily gains in five months. Why the sharp drop on Thursday?

Commentators believe that concerns about an economic recession are prevailing. The new batch of economic data released on Thursday has indeed strengthened the market's expectations of a Fed rate cut. However, the pricing of futures contracts shows that traders have fully digested the expectation of three rate cuts this year. While monetary easing is often beneficial to US companies, the tense economic sentiment has weighed on US stocks. The economic data has further worried investors, as even if the Fed cuts rates in September, it may be too late to prevent a recession.

The number of initial jobless claims in the US last week exceeded expectations, rising to 249,000, hitting a one-year high. The gap between the actual increase and the Wall Street expectation of 235,000 is the largest since August last year, indicating a cooling labor market. The US manufacturing activity index, the ISM Manufacturing Index, unexpectedly fell to 46.8 in July, the lowest since November last year, signaling the largest contraction in manufacturing activity in eight months, further indicating weakness and hinting at economic contraction.

Analysts point out that the employment sub-index in the ISM manufacturing survey plummeted to 43.4, well below the expected 49.2, hitting a new low since June 2020, the worst performance since 2009 excluding the period of the COVID-19 pandemic. Another sub-index, new orders, also fell below expectations, making the overall data even weaker. The initial market reaction was to increase bets on rate cuts, but the clear weakness in the labor market raises doubts about whether it is beneficial for US stocks.

Chris Rupkey, Chief Economist at FWDBONDS, commented that the data released on Thursday continues to point towards economic weakness, even recession. The stock market is unsure whether to laugh or cry, as although the Fed may cut rates three times this year and the yield on the 10-year Treasury fell below 4.00%, the winds of recession are blowing fiercely Robert Pavlik, senior portfolio manager at Dakota Wealth, said that the overall US stock market was impacted by the weak ISM manufacturing report, which indicated to the market that the economic conditions may actually be worse than expected. Furthermore, Federal Reserve Chairman Powell remains on hold without cutting interest rates, causing concerns.

Thomas Ryan, economist at Key Investment Macro, stated that the further decline in manufacturing adds to the risk of losing momentum in US economic growth in the third quarter, and the sharp drop in employment index will exacerbate concerns that it may be too late for the Fed to ease policy.

Some analysts have pointed out that the US unemployment level is now approaching an economic recession indicator proposed by former Fed economist Claudia Sahm, known as the Sahm Rule. Wall Street News once introduced that according to the Sahm Rule, when the three-month moving average of the US unemployment rate minus the previous year's low unemployment rate exceeds 0.5%, it signals the early stages of an economic recession in the US. The Sahm Rule has never failed in the past half century, accurately predicting all 11 economic recessions since 1950.

Last week, former "number three" at the Fed, William Dudley, called for a rate cut in July, warning that delaying the rate cut would increase recession risks. In his article, he pointed out that one reason why Fed officials hinted at no action in July is that they misunderstood the labor market and were not very concerned about the risk of the unemployment rate breaking the Sahm Rule. They believed that the rise in the unemployment rate was due to rapid labor force growth, not increased layoffs. However, this logic is not convincing, as the Sahm Rule accurately predicted the economic recession in the 1970s when the US labor force was also growing rapidly.

Dudley believes that historical records show that a deterioration in the labor market can create a self-reinforcing feedback loop. When jobs become increasingly difficult to find, households cut back on spending, the economy weakens, businesses reduce investment, leading to layoffs and further spending cuts. This can explain why the unemployment rate always rises significantly after surpassing the 0.5% threshold of the Sahm Rule