NEW YORK ( TheStreet) -- Major U.S. stock averages dropped Thursday after a choppy trading session, as investors worried the Federal Reserve would scale back stimulus and China could be headed for a slowdown. A better-than-expected jobless claims report gave way to worries that the labor market was indeed improving and would encourage the Federal Reserve to taper its bond-buying program. Manufacturing data in China indicated an unexpected contraction in manufacturing activity in the country, culminating into the steepest decline for the Nikkei 225 in Japan since the aftermath of the tsunami and nuclear disaster in March 2011. The index closed down 7.3%. "We had about a 3% intraday move to the downside from yesterday's high to today's low based upon what came out of the Fed yesterday," said Phil Orlando, chief equity market strategist at Federated Investors. Equities did retrace from their intraday lows by midday. "This market has gone vertically . . . and this is the most hated rally in the history of the stock market . . . and I expect down 3% some cash started to come into the market at the margin." The S&P 500 closed down 0.29% to 1,650.51, easing off its intraday low. The Dow Jones Industrial Average was off 0.08% to 15,294.50. The Nasdaq slipped 0.11% to 3,459.42. Hewlett-Packard's ( HPQ) huge jump in share price and firm new-home sales and home price reports were just a few of the bright spots during an otherwise dim day. Hewlett-Packard surged 17.1% to $24.86 after the PC and printer maker posted earnings on Wednesday that beat Wall Street expectations. Fed Chairman Ben Bernanke's testimony before Congress Wednesday reaffirmed the importance of a sustained improvement in the U.S. labor market as a precondition to tapering asset purchases, and the jobless claims report Thursday appeared to be consistent with such an improvement. "We believe that by September, the FOMC will have seen enough evidence of firming labor market conditions to modestly pull back on bond purchases," John Ryding and Conrad DeQuadros, economists at RDQ Economics in New York, wrote in a note. Minutes Wednesday from the Federal Reserve's latest policy-making meeting showed that some members are open to scaling back monetary stimulus by June. Nevertheless, Jordan Waxman, managing director and partner at HighTower HSW Advisors in New York, maintained that despite the intraday market pressures "the tenets of the bull market remain intact: strong earnings and corporate balance sheets, shrinking equity supply and little yield in fixed income alternatives and cash," he said. "We are looking for opportunities in cyclical names and industries, which are now historically very cheap to the consumer staples stocks we had been buying into the new year." Dover ( DOV) tacked on 4.1% to $79.54 after the industrial conglomerate said it plans to spin off some of its communication technologies businesses into a publicly traded company. Upon the completion of the spinoff, the new company, Knowles Corp., will have $1.3 billion in annual revenue, the company estimated. Ralph Lauren ( RL) was off 2.3% to $183.69 after the luxury goods company posted lower-than-expected revenue of $1.64 billion vs. the average analyst estimate of $1.7 billion, as sales at its wholesale unit fell 4% to $796 million from last year. Salesforce.com ( CRM) was off 0.2% to $45.69 ahead of its first-quarter earnings release after the market close. The largest maker of online customer-management software is expected by analysts to post earnings of 10 cents a share on revenue of $887.1 million. The Labor Department reported that initial jobless claims for the week ended May 18 fell 23,000 to a better-than-expected 340,000 the prior week. Economists, on average, were expecting claims to dip to 345,000. The four-week moving average on initial jobless claims was 339,500, a decrease of 500 from the previous week's 340,000. Continuing claims for the week ended May 11 decreased 112,000 to a lower-than-expected 2.912 million in the week ended May 11. The consensus estimate among economists was for a decline to 3 million. In China, fears of a slowing economic recovery were being sparked by a drop in the flash HSBC Purchasing Managers' Index. The preliminary report on manufacturing showed that China's factory activity shrank for the first time since October, with the index softening to 49.6 in May, below the 50 level dividing expansion and contraction. "These new PMI numbers that came out of China ... was the first time the index has fallen in seven months, which could be a huge problem for Japan because 19.7% of Japan's exports are to China," said Aaron Izenstark, chief investment officer at IRON Financial. The real estate market once again provided a measure of consolation to investors Thursday, with a report showing continuing improvement in U.S. home values. The Federal Housing Finance Agency's Housing Price Index for March showed a gain of 1.3% vs. an upwardly revised 0.9% increase in February. The Census Bureau reported that sales of new single-family houses rose 2.3% to a greater-than-expected seasonally adjusted annual rate of 454,000 in April, from an upwardly-revised March rate of 444,000. Economists were expecting a rise to an April rate of 425,000. June gold futures popped $24.40 to settle at $1,391.80 an ounce. July light sweet crude oil futures fell 3 cents to $94.25 a barrel. Follow @atwtseWritten by Andrea Tse and Joe Deaux in New York >To contact the writer of this article, click here: Andrea Tse.