The Best Way to Trade the Friday Jobs Report for Profitable Result

It’s possible to make Friday Jobs Report trading strategies. One of the most important macro numbers on this planet is the monthly US job report. As a bonus, at the end of this article, we provide you with the code for the monthly jobs report for both Amibroker and Tradestation (And Plain English for Python and other code languages).

This article explains what the monthly job report is, why it’s important, and finally, we do some backtests on how stocks and bonds perform after the job report – both on the same day and the following week.

The report sets the bond traders on fire and subsequently the stock market because the interest rates are the main determinant of the valuation of stocks. Thus, any equity trader should at least be aware when this number is published: the first Friday of the month at 0830 ET – one hour before the opening of NYSE.

Our backtests indicate the day of the jobs report shows abnormal positive returns but the effect seems to disappear after the first day.

Table of contents:

What is the Friday job report?

As mentioned, the Friday job/employment report is published monthly and usually on the first Friday of the month. It’s published by the US Department of Labor.

The report’s main numbers are nonfarm payroll employment and the general unemployment rate.

However, the report has many numbers and is several pages long. It’s regarded as the most important macro number.

Why the Job/employment report is important

The Friday job report is important because a hot job market usually leads to rising interest rates and vice versa. Rising rates are not positive for stocks because most equity investors demand a higher risk premium for owning stocks. Hence, stocks go down.

Opposite, lower rates are positive for stocks. This is observed via the earnings multiple: over the last four decades since the US interest level topped in the early 1980s, we have witnessed an extraordinary multiple expansion (P/E).

The valuation varies from sector to sector, but the average P/E in the S&P 500 is currently (October 2021) around 25. This implies a 4% estimated return for owning (risky) stocks (this is the earnings yield). Historically, this earnings yield is very low. As of writing, October 2021, the earnings yield minus the current inflation rate is negative. This is rare.

Backtesting the Friday jobs report

Let’s test several potential trading strategies for the Friday jobs report:

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First, we test the intraday movement from the open to the close in stocks and bonds (day trade). We buy the S&P 500 on the open and sell at the close on each Friday jobs report:

The test is done by investing 100 000 in the ETF with the ticker code SPY (S&P 500) from its inception in 1993 up to and including September 2021. We buy the open and sell at the close. The average gain is 0.09% which is much better than any random day. The win ratio is 55% and the average winner is bigger than the average loser.

Most of the gain over the last decades has come from owning stocks from the close until the next day’s open. During the last 25 years, the gain from the open to the close is practically zero. This highlights the strong performance in stocks this particular day. We have separated the different gains from the close to open and open to close in a previous article:

Night strategies trading (overnight edges/strategies)

Readers might argue the strong intraday performance is because interest rates have fallen. Indeed, they have, but how has TLT performed on the Friday jobs report? TLT is the ETF for the 20 year Treasury Bonds:

We only have data back to 2003 for TLT, but we can clearly see the negative drift: the average gain is minus 0.04%. This means that the rates on average have gone up on the Friday jobs report (falling bond prices means the coupon goes up in relation to the price and thus a lower price equals higher yield).

How does the stock market perform in the week following the Friday job report?

Our backtest buys SPY at Friday’s open and sells at the close x days later:

The first column is the number of days. The best result is by owning the S&P 500 from Friday’s open to Monday’s close. The effect is weak as time goes on.

Summary of the Friday jobs report:

The Friday job report has been a positive day for stocks, but the effect vanes quickly. After the following Monday, it seems to have no effect.

Amibroker code for the job report:

Buy = DayOfWeek()==5 AND Day()>1 AND Day()<9;
BuyPrice=Open;
Sell = 0;
SellPrice=Close;

Tradestation code for job report:

If dayofweek(date)= 4 and dayofmonth(date)>=1 and dayofmonth(date)=<8 then buy next bar at open;
Sell this bar at close;

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FAQ:

What is the significance of the monthly US job report in trading?

The monthly US job report is a crucial macroeconomic indicator that can significantly impact financial markets. It provides key information such as nonfarm payroll employment and the general unemployment rate, influencing interest rates and, subsequently, the valuation of stocks.

When is the monthly job report published, and why is it essential for traders?

The job report is typically published on the first Friday of the month by the US Department of Labor at 8:30 AM ET. Traders, particularly in stocks and bonds, closely monitor this report as it sets the tone for market movements, given the profound impact of employment data on interest rates and stock valuations.

How does the monthly job report affect bond traders and the stock market?

The report can ignite reactions in both bond and stock markets due to its influence on interest rates. Rising employment often leads to higher interest rates, which may negatively affect stock valuations. Understanding the job report’s impact is crucial for traders to make informed decisions.