Stocks closed up modestly after a report on the Federal Reserve's December meeting threw up red flags on the economy and sparked a dramatic 175-point swing in the Dow.
The Dow Jones Industrial Average made a sharp reversal before closing slightly higher, while the Nasdaq finished upand the S&P 500 ended lower.
Members of the Federal Reserve Open Market Committee agreed that inflation, although moderating, continues to be their main concern. The minutes also showed the Fed believes housing continues to weigh heavily on the economy but that it hasn't spilled over significantly.
"Welcome to 2007. It's going to be a very different year. It's going to be a return to a more normal level of volatility in the market, meaning a lot more swings than we've seen in the last two years," said trader Mike Driscoll, managing director at Bear Stearns.
The S&P energy sector slumped nearly 4%, dragged down by the almost $3 dip in oil prices.
Driscoll, who trades energy stocks, said he saw across the board selling in the group from the opening bell on the steep decline in oil prices. "It's literally they're throwing out the baby with the bath water," he said.
Earlier stocks made gains on positive economic data and a steep decline in oil prices. Stocks began to give up gains after midday and the markets started heading lower just before the Fed's comments were reported.
Some believe the market was poised for a selloff regardless of what the Fed minutes contained.
"It's not necessarily what's in the Fed minutes, it's the expectations of the Fed minutes," said Jordan Kotick, Global Head of Technical Analysis at Barclays Capital. "The Fed just exasperated something that had already begun."
Stocks had moved higher at the opening and got a further boost from ISM and construction spending data reported at 10 a.m. Traders were also encouraged by recent rallies overseas, a better-than-expected December sales forecast from Wal-Mart and the decline in crude oil prices. Home Depot further added strength to the Dow on news its CEO resigned.
The dollar turned higher after a five day losing steak and moved up even more on this morning's economic news. Manufacturing and construction data came in better than expected. The December ISM Manufacturing Index number came in at 51.4 versus the 50 that was expected, due to gains in new orders and production. Construction spending declined 0.2% in November, but that was less than analysts were expecting.
Home Depot had helped the Dow early on.The home improvement giant's Chairman and CEO Robert Nardelli resigned and will be replaced by the current vice chairman, Frank Blake, effective immediately. Nardelli will receive a $210 million separation package.
"This is, I think, an attempt to start to clean things up and get them organized so that Home Depot can feel good about what it's working on, the employees can feel good and people can feel good about doing business there," said David Schick, Retail Analyst at Stifel Nicolaus & Co.
Dow component Wal-Mart also traded higher on news over the weekend that its same-store sales rose a better-than-expected 1.6% in December.
New York light crude futures fell more than $2.50 during the session on expectations of more mild winter weather in the U.S. Fimat senior vice president John Kilduff said a factor affecting crude is the poor outlook for heating oil.
Natural gas, he said , is about half the price of heating oil and big users are switching over to gas.
Private sector employment fell by 40,000 jobs in December, the first decline in nearly four years, according to the ADP employment report. Economists had been expecting an increase of more than 100,000 jobs.
European Stocks Close Mixed
European stocks ended mixed, taking a breather after Tuesday's surge to nearly six-year highs.
The DAX was finished up in Frankfurt. The German government said the number of unemployed people fell by 108,000 in December, much more than the drop of 45,000 economists surveyed by Dow Jones predicted.
"The positive trend of the past year continued in December," Fabienne Riefer, economist at Postbank, told Reuters. "The improvement in the economic cycle played a big role, even if one-off factors ... had an impact in December."
Also in Germany, Siemens declined slightly in the wake of a report by the German edition of the Financial Times that the conglomerate is being investigated about possibly paying a bribe to former Iraqi leader Saddam Hussein to secure contracts in the food-for-oil program.
London's FTSE 100 closed higher. Shares of chip maker CSR falling 3.8%. A U.S. group is suing mobile phone makers, including Nokia and Samsung, for violating a Bluetooth technology patent, targeting products containing CSR's Bluetooth chips.
And telecom bellwether Vodafone edged up after an analyst said that the company is unlikely to pay a substantial premium to secure a majority stake in Indian mobile operator Hutchison-Essar. Vodafone has offered about $17 billion for the company.
Paris' CAC-40 finished lower.
Korea Sells Off, Singapore Rises
Asian markets were mixed Wednesday with Seoul and Sydney closing lower while Singapore and Hong Kong made gains.
Profit-taking hit Australian shares resulting in a reversal of early gains as participants await direction from Wall Street and the London Metal Exchange. South Korea's Kospi Index finished sharply lower with exporters such as Samsung Electronics down after a slowdown in 2007 export growth was forecasted amid a firmer won and a slowing U.S. economy.
Singapore's Straits Times Index, powered by strong economic data, crossed the 3,000 level for the first time ever, led by banks and property stocks. It closed 1.7% higher. Hong Kong's Hang Seng Index also pushed forward following a record performance the previous session as investors bought Hong Kong-listed Chinese stocks and heavyweight China Mobile.
Thailand stocks slid 3% to a two-week low as wary investors sold big-cap shares due to fears of new political instability following the spate of New Year's Eve bombs in Bangkok.
Japanese markets were closed Wednesday for a holiday.