"What I think today's number does is remind people of the bigger picture. The U.S. economy is pretty mediocre and that will alter the pace of rate hikes. I don't think it will affect the timing of the first rate hike, but the timing of what comes after," said Peter Boockvar, market strategist at The Lindsey Group. "Ultimately people are going to have to make a decision on not what the Fed's doing, but on the economy and earnings."
The S&P 500 rose nearly 1.3 percent Thursday to 2,065. The Dow rallied 259 points to 17,895 on relatively light volume, and it came on the heels of a volatile week for stocks that had taken the S&P 500 down 3.7 percent from its Feb. 25 high, as of Wednesday.
The market's wide swings picked up steam after last Friday's nonfarm payrolls showed surprisingly strong job gains of 295,000 in February. That started chatter that the Fed could move more aggressively and perhaps hike in June and pick up the pace of tightening, even though many economists still believe the first increase will be in September.
Fed watchers also expect the central bank to remove the word "patient" from its statement on rate increases when it meets next week, and that would be a warning to markets that the hiking cycle is about to begin.
"I really do believe that people now are correcting the overreaction to the employment number, and you had the retail sales number which was bad. That leads people to believe the Fed's not going to move big, and not move quickly," said Steve Massocca at Wedbush Securities.
Some strategists have expected a volatile ride for stocks into next Wednesday's meeting of the Federal Open Market Committee as the markets adjust to the change in the Fed's stance.
Compounding the moves have been the push-pull from other markets. Europe has been a significant factor, as the European Central Bank has embarked on an easing program this week, just as the Fed gets set to signal tightening. That has helped propel the dollar against the weakening euro, and U.S. rates also followed the lead of European sovereigns, which saw yields fall on ECB bond buying.
"We are following Europe. We're closing in on proximity to the Fed, the next FOMC, and I think we're following through on the dollar," said David Ader, chief Treasury strategist at CRT Capital. "The retail sales number doesn't change anything. As weak as it was, and as weak as the prior months were, there is a continuing view out there that says, 'it's weather.'"
The 10-year Treasury yield was flat, at 2.11 percent in late trading Thursday, but the 30-year yield was higher after a disappointing 1 p.m. auction.
"Between now and then (the Fed meeting), without a lot of critical information, we're trading the removal of the 'patient' language which means they can go as early as June, and for the moment the market is OK with it," said Ader. He added that the 10-year yield could move in a range from about 1.95 percent to 2.11/2.12 percent ahead of the Fed meeting.
James Paulsen, chief investment strategist at Wells Capital, said the stock market could continue its gyrations into the Fed meeting. He expects the market to be constrained as it adjusts to a higher rate environment.
"My (S&P) range has been a little above 2,200 and down to 1,850," said Paulsen. "I still think we might cover that whole range. I think we have to have a rate structure reset and we have to deal with that. We have a little too high sentiment and a little too high valuations."