The monthly U.S. Non-Farm Payrolls (NFP) report is one of the most closely watched economic indicators, and with good reason. This report not only provides insights into job creation across the U.S. but also serves as a barometer for economic health and the Federal Reserve’s next moves on interest rates. For investors, understanding how the S&P 500 might respond to different NFP outcomes can help them make better-informed decisions. John Flood has offered a concise framework for interpreting how the S&P might react to different NFP headline numbers. Let’s break down this playbook.

>250,000 Jobs Added: Expect a Notable Sell-Off (-100 bps or more)

When the NFP report shows over 250,000 jobs added, Flood anticipates a minimum 1% drop in the S&P 500. Why? A report this strong may signal an overheating economy, potentially leading to inflation concerns. Investors might anticipate a hawkish Federal Reserve stance, as continued job growth at this level could push inflation higher, encouraging rate hikes. Higher interest rates often mean higher borrowing costs and lower valuations, which can negatively impact equities, hence the potential sell-off.

200,000 – 250,000 Jobs Added: Moderate Sell-Off (-50 to -100 bps)

With NFP numbers in the range of 200,000 to 250,000, Flood expects a more moderate but still notable decline in the S&P 500, around 0.5% to 1%. This range represents solid growth, though less striking than the >250,000 range. Investors might still view this as an indicator of strength, enough to worry about future rate hikes without triggering the same level of concern that >250,000 would. A mild sell-off is expected, but not to the same extent as with stronger job growth numbers.

125,000 – 200,000 Jobs Added: Mild Movement (+/- 50 bps)

In this middle range, the S&P 500 is expected to either remain stable or experience slight fluctuations within half a percentage point, up or down. This range is seen as relatively neutral, reflecting steady economic growth without significant inflationary pressure. For the Federal Reserve, numbers in this bracket may signal stability, potentially allowing it to maintain its current policy stance. Investors typically interpret this as neither a reason to sell nor a reason to buy aggressively.

75,000 – 125,000 Jobs Added: Rally Mode (+50 to +100 bps)

An NFP result between 75,000 and 125,000 jobs added could trigger a rally, with the S&P 500 expected to rise between 0.5% and 1%. Numbers in this range may indicate moderate economic growth, enough to reassure investors about economic health but not high enough to raise concerns about inflation or more aggressive rate hikes. For markets, this range could signify a “Goldilocks” scenario—growth that’s “just right” for maintaining a stable rate environment, which can be bullish for equities.

<75,000 Jobs Added: Potential Minor Sell-Off (-0 to -50 bps)

When job growth dips below 75,000, the S&P 500 could see a mild sell-off of up to half a percentage point. Low job numbers might signal economic slowing or even recessionary risks, leading to potential concerns over corporate earnings and future growth. However, since lower jobs numbers might also reduce pressure on the Fed to maintain high rates, the impact on the S&P 500 might be softened somewhat, resulting in a more tempered decline.

Key Takeaways

Flood’s reaction function to the NFP report gives investors a straightforward way to interpret likely market movements based on headline employment numbers. While this framework doesn’t guarantee outcomes, it helps establish expectations around how the S&P 500 may react to different levels of job growth. As always, it’s important to remember that a range of other factors can impact market reactions, from Fed commentary to other economic indicators. However, having a structured approach to the NFP data can give investors a valuable tool for navigating market volatility and making informed trading decisions.

If you’re following the market closely, keep John Flood’s reaction function in mind during the next NFP release.