Should I be looking at the market while under first year of two year contract? I have a two year contract as a visiting assistant professor. Is it normal to be keeping an eye on the market and perhaps selectively sending out applications now in my first year, or should I be holding off completely until next year?

I suppose the tricky thing is I'd ideally want a letter from my current chair, and I haven't discussed it with them. A postdoc who also started this year though asked if I'd be looking around, as it seems they will be, so there seemed to be some consensus perhaps that this was normal? Figured I'd throw out the question to see if anyone has had similar experiences.
Yes, absolutely be on the lookout for opportunities

Your employer has made it abundantly clear that they intend to kick you out after two years: It says so right on the contract. If you do not plan for that time, you will be unemployed and with no appointment/affiliation, both of which are more problematic than they should be.

So it is only natural you devote some time to your future options - regardless of it being in Academia even. As an academic in particular we know, that hiring processes tend to be very long; and you very often have to move far away / abroad so the logistics and legal aspects are more complex and again, take longer. So it's doubly important to plan well in advance for an academic.

Concrete suggestions:


Don't look for a letter from the chair of your department early into your contract - unless the subject somehow comes up. I'd feel comfortable asking for something like that after I've done something impressive and/or once I have one year or less remaining. 
Tell prospective workplaces that you are mostly interested in starting out in 2 - X years (with X being the time into your current 2-year contract), but also say that this is flexible. Because it is: You could wait a while, on one hand; and you could also give notice and quite earlier than the full two years, on the other hand.
Give independent consideration to whom you want to share your active job-search with. Telling people about this can have both positive and negative effects.