Did Wall Street read Yellen comments wrong?

Did Wall Street initially misread and misinterpret Federal Reserve Chair Janet Yellen's spoken words regarding the timing of interest rate hikes? Thursday's stock market rebound, which erased most of Wednesday's $150 billion paper loss, suggests that they did.

Thursday's price action was a mirror image of Wednesday. The Dow Jones industrial average rallied 109 points, or 0.7%, to 16,331, regaining most of the previous day's 114-point loss.

Investors reassessed their initial analysis that it is a foregone conclusion that the Fed will start to raise short-term interest rates sooner than expected next year.

Traders also second-guessed the knee-jerk reaction that says rising rates a year from now is necessarily a bull market killer, especially with fresh evidence that the economy is regaining some of its vigor after a soft patch this winter.

STOCKS GAIN: Economic news offsets rate fears

Readings on leading economic indicators, manufacturing in the Philadelphia region and initial jobless claims all beat expectations on Thursday.

Sam Stovall, chief equity strategist at S&P Capital IQ, thinks investors realized they overreacted for two reasons;

"Number one, (investors realized) that rates wouldn't begin to rise for a year at the earliest," says Stovall. "Number two, (they concluded) that higher rates would be a sign of a recovering economy."

The Yellen-driven sell-off on Wednesday was due to the market's interpretation of a comment she made related to when the Fed might start raising short-term rates, which are now pegged near 0%. Yellen said increases could begin "six months" after the end of the Fed's bond-buying program, which is scheduled to end this October or December. The new timetable for rate cuts, therefore, was fast-forwarded to April or June of 2015, far earlier than a late-2015 date that investors had priced in.

Thursday, Wall Street got back to thinking that a Fed move to increase rates isn't the end of the world, says Bill Stone, chief i! nvestment strategist at PNC Asset Management.

"The stock market is reassessing things today," Stone says. "Despite the change in guidance, an increase in short-term rates due to better economic activity is certainly positive for stocks."

Any rate increases that do come will come slowly, adds Mark Luschini, chief investment strategist at Janney Montgomery Scott.

"Investors have had some time to realize that even if the Fed begins to raise rates in mid-2015, that pace will likely be glacial," says Luschini.

Signs of an improving economy offset some of the rate-related jitters, says Jim Paulsen, chief investment strategist at Wells Capital Management.

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"The stock market was quickly reminded this morning that it really isn't that important what the Fed thinks today; rather what is important is how the economy is doing on Main Street," says Paulsen.

"Does anyone really want to be out of this market if the economy is re-emerging from its weak, weather-distorted first-quarter performance?" says Paulsen. "Who wants to be on the sidelines if and when the market digests the idea of the economy finally growing at 3%?"