Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Suddenly, the market sees growth—and rate hikes

Santelli Exchange: Job growth not delivering economic growth?
Santelli Exchange: Job growth not delivering economic growth?

The recent stock rally and mildly encouraging economic data have investors feeling a little braver.

In their views on the market, investors are looking for better conditions than what has persisted since mid-2015. As for the ensuing actions the Fed might take on monetary policy, the view is now tilting back toward additional rate action this year.

Owing to a number of factors, the tumbled more than 13 percent from its mid-July peak to what could be a durable bottom established Feb. 11. Since then, the index has jumped more than 9 percent, with Tuesday's monster rally fed by a modest increase in a key manufacturing index. (The market sustained a mild pullback Wednesday.)

During the period, professional investors have gotten a lot more confident. In the most recent Investors Intelligence survey, which polls newsletter editors, bulls topped bears by a margin of 36.4 percent to 34.3 percent. It was the first time the bulls prevailed in seven months. Just a month ago, bullishness was at 24.7 percent, a level even lower than March 2009, just before the bull market began.

Read More Services surge gives boost to jobs picture

Not surprisingly, that's changed the outlook regarding Fed policy moves.

Trader on the floor of the New York Stock Exchange.
Getty Images

As markets dipped and recession fears grew, the chance of the next Fed rate hike at one point was pushed into early 2018. However, that has reversed significantly over the past few days.

Fed fund futures contracts show the first rate hike is now fully priced in for March 2017. The CME Group's FedWatch tool, which uses futures contracts to devise probabilities for rate hikes at each Federal Open Market Committee meeting, now assigns a better than even — 53 percent — chance that a hike could come as soon as November. September is a near-miss, with a 49 percent projection.

That's a huge change in sentiment brought about by a market rally that is barely 2 weeks old. Just a month ago, traders assigned only an 18 percent chance of a rate hike going all the way out to February 2017. Futures contracts indicated little chance of a hike through the end of next year.

Read MoreHere's what they're saying about 2016 economy NOW

The change has been fueled by a number of factors and shows how dependent the Fed — or at least market perceptions of the central bank — is not just on economic data but market movements. Traders have been buying stocks as oil has gained 17 percent since Feb. 10, China fears have faded and a recession scare also has drifted into the background, despite a less-optimistic scenario for first-quarter growth and continued declines in corporate profits.

Jim Paulsen, chief investment strategist at Wells Capital Management, has been cautious on the markets and economy. However, he said in an analysis released Tuesday that the economy appears to be stabilizing, and that in turn could fuel investor confidence.

"Eventually, stock investors may again become troubled by the speed and frequency of potential Fed interest rate hikes. Initially though, better economic reports should continue to calm recession fears and bolster Wall Street earnings forecasts," he said. "However, given that the missing 'catalyst' for the stock market has seemingly arrived — better economic growth — perhaps the stock market is headed for another challenge of the all-time highs."