Investors were anxiously expecting the jobs report as they looked for more clues about whether the Fed would raise interest rates in September. Market expectations for a rate hike in September fell to 24 percent from 27 percent following the report's release, according to the CME Group's FedWatch tool. Expectations also fell as low as 12 percent Friday.
"Bad news is good news. This report was so terrible across the board that the market is thinking rationally the Fed ... is not going to be so cavalier as to raise rates in September," said Phil Orlando, chief equity strategist at Federated Investors. He added that December is still open for a Fed rate hike.
"If I'm the Fed, I just sit on my hands, wait for December and hope for the best," he said.
The U.S. economy added 151,000 jobs in August, with the unemployment rate coming in at 4.9 percent. Economists polled by Reuters had forecast 180,000 were added last month, while the unemployment rate remained at 4.8 percent.
"This is not what the Fed wanted to see," said Lindsey Piegza, chief economist at Stifel Fixed Income. "The Fed wanted to see evidence that the June and July reports were indicative" a strong labor market. She added the Fed's next meeting, scheduled for September 20-21, will be held against a backdrop of a weak first half of the year and a labor market that is losing momentum.
"Some analysts may cite seasonal and calendar issues surrounding the disappointing Nonfarm Payrolls reading as contributing to the shortfall; however, the recovery has far less momentum than the Chairman and her colleagues think it does," Jeremy Klein, chief market analyst at FBN Securities, said in a Friday note to clients.
Andrew Chamberlain, chief economist at Glassdoor, struck a more positive note when talking about the report. "My take is 151,000 is a very middle-of-the-road number," he said, noting that August marked the 71 straight month with positive job gains, the longest on record.
"It is a symptom of how well the economy has been doing that we view 151,000 as a bad number," he said.
U.S. futures rose from near break-even after the report's release.
"I'm in the camp that this was a great number for the stock market," said Jason Thomas, chief economist at AssetMark. He added, however, that economic "growth has been surprisingly slow."
"There's a tremendous amount of uncertainty," Thomas said. "When you compare that with the fact that investors want yield ... I think that's a drag."
Other data due released Friday included July factory orders, which rose 1.9 percent, slightly below the expected 2 percent.
Naeem Aslam, chief market strategist at Think Markets, said the jobs report "was not sturdy, however the Fed only needs a number which blows just enough wind for their ship to sail."
Richmond Fed President Jeffery Lacker said in a speech the U.S. economy looks strong enough to merit higher rates. Lacker is not a voting member until 2018.
Still, AssetMark's Thomas said investors can look past those remarks since recent data supports a view within the Fed that the equilibrium rate is lower.
In oil markets, U.S. crude settled 2.97 percent higher at $44.44 a barrel, amid Russian comments favoring a production freeze.
Overseas, European equities rose broadly, with the Stoxx 600 index advancing nearly 2 percent. In Asia, stocks closed mostly flat, with the Shanghai composite gaining 0.13 percent and the Nikkei 225 falling just 0.01 percent.