The Federal Reserve’s decision to stop its interest-rate hikes, at least temporarily, is a break for consumers who’ve watched everything from their credit cards to mortgages get more expensive.

The question now is what this means for investors. And timing may be everything.

History shows the prospects for the current bull market to keep running improve if policymakers opt for a longer pause before delivering the next rate increase they’re signaling. But things change if the central bank skips just one meeting before resuming its hikes.

There have been six episodes since 1970 where the central bank increased rates by more than 100 basis points over a year or longer and then paused for at least three months. And they have been a boon for stocks, with the S&P 500 Index jumping 8.2% on average in the 90 days after such a respite, almost quadrupling its average three-month advance during the period analyzed, data compiled by Bloomberg Intelligence show.

This time, however, the halt after 10 straight hikes comes with a big caveat: Policymakers expect rates will rise further. That would suggest more of a “skip” than a “pause” — a very different scenario. But don’t tell that to investors who just pushed the S&P 500 to a fifth straight week of gains, its longest winning streak since 2021.

“Which word should you put more emphasis on when it comes to a ‘hawkish pause’?” Scott Ladner, chief investment officer at Horizon Investments, said by phone. “Investors are calling the Fed’s bluff on its hawkish rhetoric.”

From Tuesday’s close through trading Friday, the S&P 500 jumped 0.9%, the best showing since February from a Fed decision day to the weekend, data compiled by Bloomberg show. That pushed the index’s rally since October’s closing low to 23% and left it about 8% below its all-time high. On Thursday, the volume of call options on the S&P 500 Index jumped to a record.

Tightening Foretold

The Fed’s dot plot showed the majority of voting members see at least two more quarter-point hikes this year amid stubbornly high inflation and labor-market strength. Chair Jerome Powell at one point called the decision to pause hikes a “skip” during his press conference on Wednesday, but then corrected his language.

Meanwhile, swaps traders are ignoring the guidance and betting on just one more quarter-point hike this cycle, most likely next month. However, resuming hikes right away presents a potentially more problematic scenario for stocks, as Bloomberg Intelligence analysis shows a skip makes the market outcome less predictable.

“There’s a difference between a pause and a skip, and we could be underestimating how meaningful that is,” Gina Martin Adams, chief equity strategist at BI, said on Bloomberg Radio.

For example, when the Fed skipped a rate increase in January 1989 and then went back to hiking, the S&P 500 rose over the next three months. But in 2000, when the Fed stopped its tightening cycle in April and resumed it in May, stocks fell 1.5% in the next three months, according to BI data.

Read BI’s research: Stocks Likely to Greet a Rate-Move Skip Differently Than a Pause

Equity bulls are getting some encouragement from headline inflation data. Consumer prices rose 4% in May from a year earlier, the slowest pace since 2021, according to data released last week. To be sure, the core reading has been stickier. Also last week, separate figures showed the longer-term trend of slowing goods consumption continues.

All of this adds to investors’ optimism that the Fed won’t spur a severe recession as it fights inflation, a notion that helped extend the S&P 500’s gains last week. Granted, the momentum has some technical charts looking extended. The S&P 500’s 14-day relative strength index, for instance, is above the level of 70 that some analysts view as a sign of overheating.

Traders also point to the improving breadth of the stock market’s advance, as lagging groups like small caps, materials and financials join the rally. An equal-weighted version of the S&P 500 is on track to beat its market cap-weighted peer this month for the first time since January.

“The US economy has been so much more resilient than anybody has expected,” Anastasia Amoroso, chief investment strategist at iCapital, said on Bloomberg TV. “This exuberance might be justified.”

--With assistance from Edward Bolingbroke.