U.S. stocks traded higher on Thursday as mixed economic data indicated to some investors that the Federal Reserve will not raise interest rates as early as anticipated.
The market rebound is "probably in response to a lot of folks (who) think the Fed will not be raising rates. The U.S. economy seems to be cooling," said Bruce Bittles, chief investment strategist at RW Baird, citing weak retail sales that offset an encouraging decline in jobless claims.
Read MoreWatch out for market mood swings
Bittles added that at the beginning of the year his firm had expected the Fed not to raise rates because of strength in the dollar and instability in the global economy, two ongoing conditions.
The Dow and S&P gained more than 1 percent to trade moderately higher for the year. The Nasdaq extended gains for the year.
"I think it was just a reversal of yesterday," said Jack Ablin, chief investment officer at BMO Private Bank. "I understand the concern (about the rapid dollar rally) but perhaps investors are overly concerned about the Fed and the dollar."
The U.S. dollar fell about half a percent, pausing its recent rally. The euro edged higher to $1.06, up from 12-year lows hit on Wednesday.
"At least on a one-day basis we have a reprieve from the (strong dollar)—very much analogous to the decline we saw in oil prices," said Art Hogan, chief market strategist at Wunderlich Securities.
The Federal Reserve said on Thursday that household net worth rose by $1.5 trillion in the fourth quarter of 2014 to a record $83 trillion, with gains driven by real estate.
"I think (the market rally) has something to do with yesterday's Federal Reserve findings on the stress tests," said Robert Pavlik, chief market strategist at Boston Private Wealth. "I think that's helping lift the overall market (along with) initial unemployment claims. With the most recent pullback some people are looking at this as a buying opportunity."
The Dow Jones industrial average closed up more than 250 points, with Disney leading gains and Goldman Sachs rising 3 percent as the second greatest blue chip advancer. After passing its stress test on Wednesday, Goldman announced it will increase its quarterly dividend by 5 cents to 65 cents a share.
While 29 banks passed, Deutsche Bank and Santander failed the stress tests, with the Fed objecting to the capital distribution plans proposed by their U.S. units. These banks will be barred from issuing dividends or buybacks until a new plan is approved (though Deutsche's U.S. unit had not planned any dividends or buybacks in the first place).
Bank of America's approval was contingent on submission of a revised capital strategy to the Fed by the end of September.
The S&P 500 surged 1.26 percent to hold above its 50-day moving average, after falling below it on Tuesday.
"I think this is just a bit of a temporary rally and we'll see resumption of that decline. This rally is not going to be long lasting," said Peter Cardillo, chief market economist at Rockwell Global Capital.
Intel fell on the firm's lowering of its first quarter revenue outlook, noting weaker demand for business desktop PCs and that inventory levels are lower than expected. Microsoft also declined, as the second greatest laggard in the Dow.
and further declines in sales pushed the number of months it would take to clear shelves to the highest since July 2009, which suggests a stock draw down in the months ahead.
Retail sales for February fell 0.6 percent, missing expectations of a slight gain.
"For the last 3 to 4 years, that first-quarter performance has been choppy in general," said Calvin Silva, senior retail specialist with Nasdaq's Advisory Services unit. "Online stores saw an increase. Not a silver lining but an example of how consumers will shift their preference based on their situation."
Retail sales excluding automobiles, gasoline, building materials and food services were unchanged after a 0.1 percent decline in January.
The ex-auto figure is "still on the weak side, but not as weak as the headline numbers suggest," Cardillo said. The "drop in jobless claims basically is a return to normalcy after the winter months.
Weekly jobless claims fell more than expected to 289,000, below the prior week's 320,000.
"The employment picture is kind of setting up for some more optimism come summer time," Silva said, citing that winter weather might create pent-up demand for increased spending during the warmer months.
Import prices for February rose 0.4 percent, versus a revised decline of 3.1 percent in January. Export prices declined 0.1 percent, less than January's decline of 1.9 percent.
"I think the market is looking at the numbers and saying the economy is in good shape," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. "We're in the sixth to seventh year in the bull market. Earnings growth has begun to wear thin, so we'll need a boost besides (earnings). Consumer spending is the key."
Dollar General matched estimates with quarterly profit of $1.17 per share, though revenue was slightly below estimates.The discount retailer also initiated a quarterly dividend of 22 cents per share. However, the discount retailerforecast profit below estimates.
The retailer announced on Saturday plans to expand into Oregon, Maine and Rhode Island, taking its presence to 43 states.
Shake Shack, which recently went public, reported a fourth-quarter loss and said same-restaurant sales growth would slow this year.
Alibaba will invest $200 million in Snapchat, as the mobile messaging company engages in another funding round.
Hewlett-Packard edged higher despite Barclays downgrading the firm to "equal weight" from "overweight," saying it may be hit harder by the slide in the euro than previously thought.
"I do think this is a stock pickers' market because there are some parts that do better than others," said Scott Clemons, chief investment strategist at Brown Brothers Harriman. We're going to "end the year higher with lots of volatility along the way."
The entertainment and media company announced on Thursday that it is working on a sequel to the hit animated film "Frozen" and that the eighth installment in the "Star Wars" film franchise is set for May 2017 release.
The closed up 25.71 points, or 1.26 percent, at 2,065.95, with financials leading nine sectors higher and energy the only laggard.
The Nasdaq closed up 43.35 points, or 0.89 percent, at 4,893.29.
About three shares advanced for every decliner on the New York Stock Exchange, with an exchange volume of nearly 748 million and a composite volume of about 3.4 billion in the close.
Crude oil futures settled down 2.3 percent at $47.05 a barrel on the New York Mercantile Exchange. Gold futures settled up $1.30 to $1,151.90 an ounce.
The U.S. 10-year Treasury note yield traded near 2.11 percent.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 16.
U.S. stocks closed mildly lower on Wednesday as equities failed to recover from Tuesday's selloff, amid continued concern over dollar gains and the timing of a Fed interest rate hike.
As of Wednesday's close:
- The Dow Jones industrial average was within one standard deviation below its 50-day moving average. Since 1981 the index has been in this position 4.38 percent of all trading days, according to quantitative analytics tool Kensho. The probability of the index moving lower is 43.3 percent and the probability of it moving higher in the days following is 56.7 percent.
- The S&P 500 was within one standard deviation below its 50-day moving average. Since 1980 the index has been in this position 4.00 percent of all trading days, according to Kensho. The probability of the index moving higher in the days following is 58.5 percent and the probability of it moving lower is 41.5 percent.
- The Nasdaq composite was within half a standard deviation above its 50-day moving average. Since 1980 the index has been in this position 4.69 percent of all trading days, according to Kensho. The probability of the index moving lower is 43.2 percent and the probability of it moving higher is 56.8 percent.
—Reuters and CNBC.com contributed to this report.
Disclosure: CNBC's parent NBCUniversal is a minority investor in Kensho.
On tap this week:
Earnings: Ulta Salon, Aeropostale, Civeo, El Pollo Loco
8:30 am: PPI
10:00 am: Consumer sentiment
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