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Posted: Oct 18, 2018 9:47 AM
Updated: Oct 18, 2018 10:01 AM

Stock market volatility is back with a vengeance.

On Wednesday the Dow was down nearly 320 points before rebounding from the worst of its losses. At one point, it even moved slightly higher. But there was more selling in the late afternoon and the Dow wound up finishing the day down more than 90 points. The S&P 500 and Nasdaq ended flat.

The Dow's losses picked up after minutes from the Federal Reserve's latest meeting were released and showed some concerns about how long the economy could benefit from President Donald Trump's tax cuts.

In the minutes, the Fed indicated that some members were worried that "the stimulative effects of the changes in fiscal policy would likely diminish over the next several years."

Mixed bag in tech and worries about slowdown in housing

Earlier in the day, strong earnings from Netflix failed to ignite the market. Even though Netflix (NFLX) shares were up 5%, investors were alarmed by downbeat results from IBM (IBM). Big Blue's stock plunged nearly 8% and was one of the biggest drags on the Dow.

Home Depot (HD) also held the Dow back. Shares fell more than 4% following disappointing data about the housing market and worries about rising interest rates. Rival Lowe's (LOW) was down more than 3% as well.

But bank stocks continued to be a bright spot. Wall Street kings Goldman Sachs (GS) and Morgan Stanley (MS) were each up about 3%, a day after both reported solid earnings. JPMorgan Chase (JPM) shares were up more than 1% too.

Investors also may be shifting toward safer stocks in health care and consumer staples that pay nice dividends and could hold up if the economy slows as a result of higher interest rates, rising oil prices and lingering trade concerns with China.

Drug makers Johnson & Johnson (JNJ) and Pfizer (PFE) were each up about 2% and pharmacy giant Walgreens (WBA) rose nearly 1%, McDonald's (MCD) was up nearly 2% too. The fast food giant reports its latest earnings on October 23.

Wednesday's moves follow a wild week for the market. The Dow plunged more than 830 points last Wednesday and lost nearly 550 points more the next day. It then rebounded with an almost 300 point gain Friday. The market was calm Monday but the Dow surged 550 points Tuesday.

So what's next?

Joseph Quinlan, a market strategist with Bank of America's global wealth and investment management unit, wrote Wednesday that the recent volatility isn't worrisome. He said "the current pullback may be more about sector rotation."

In other words, investors are no longer solely infatuated with tech stocks -- and the big FAANG companies in particular. They are now looking more at utilities, energy, banks, consumer staples and healthcare.

A slowdown is not the same thing as a recession

Quinlan argues that "it's too early to call an end to the bull market. This beast is still kicking."

He said that the speed at which bond yields went up recently is what spooked investors. But inflation remains relatively mild and he is not expecting rates to go dramatically higher.

"We think the spike in rates was a one-off," Quinlan wrote, adding that he thinks economic and earnings growth may "moderate in the months ahead, not deteriorate or decelerate sharply."

That's the take of Joseph LaVorgna, chief economist for the Americas at Natixis as well. A slowdown in growth is not the same thing as an actual downturn. And investors may eventually realize that as well.

"Unless an economic recession unfolds over the next year, equity prices are likely to move significantly higher over the immediate term," LaVorgna wrote.

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