(MONEY Magazine) – Confused by the stock market's wild swings and the vicious pounding that tech issues have been taking recently? Well, you're certainly not alone. Investors have changed their minds about the market's prospects not once but twice since the beginning of the year. And the latest outlook is the most pessimistic--especially for tech stocks.

Earlier this year, investors were happy to keep bidding up the prices of growth stocks. Tech issues, in particular, climbed strongly, reflecting widespread confidence that the economy would continue to roar along--despite the fact that the Federal Reserve had begun raising interest rates last year. Rising interest rates did dampen high-yield stocks, particularly electric utilities.

The first big shift in perspective came in late March, when investors began to believe that rates had moved high enough to slow the economy. Tech stocks headed lower on fears of possible earnings disappointments, but overall the market outlook remained upbeat. The conventional wisdom was that the Fed would be finished raising rates by June. Whatever economic slowdown did occur would be a "soft landing"--a brief pause that would enable interest rates to fall in the second half of the year. And utilities began to rally in anticipation of a rate decline.

The second shift came in mid-May after Fed chairman Alan Greenspan hiked rates by half a percentage point, dimming hopes for a soft landing. The problem wasn't the increase--everyone knew it was coming. What scared investors was the Fed's warning of "heightened inflation pressures in the foreseeable future." Those words signaled that the Fed was willing to push rates higher still--higher than anyone had anticipated. Investors started to prepare for a more punishing economic slowdown.

The consequences of this scenario are clear. Growth stocks are the most vulnerable to further rate hikes, so tech investors should brace for more volatility. You may want to put off tech purchases for now and focus on defensive issues.

The good news long term is that dips in tech share prices will create great buying opportunities. Bellwethers such as Cisco and Oracle trade at 70 to 80 times next year's earnings, down from well over 100. But they're still pricey and could drop more. If the shares fall another 15%, to P/Es in the 60s, they'll start looking like compelling buys.

Some less popular tech stocks are already trading at reasonable multiples that are less than 1.5 times their growth rates. This group includes Microsoft at a 35 P/E, as well as IBM and Motorola, with P/Es in the 20s. They could easily fall further in the next few months, and they won't be the first tech stocks to bounce back. But they do represent long-term values for patient investors.

Safe havens

The most defensive choices--and potentially the biggest winners--over the next few months figure to be energy plays and high-yield stocks and bonds. Oil prices close to $30 a barrel may be scaring the Fed, but it will certainly help stocks of oil and gas producers. Among the majors, Texaco (TX) has one of the highest projected earnings growth rates at around 10% annually and carries a 3% yield. Because of its focus on exploration and production, the company would benefit more from rising oil prices than most of its rivals. At $57 a share, 16 times next year's earnings, Texaco looks rather cheap.

Among natural gas stocks, I like Coastal (CGP), $57 a share, which is slated to merge with El Paso Energy late this year. The combined company will be the world's largest gas transporter. In addition, gas production is growing more than 20% annually. That holds out the promise of strong earnings growth, since gas prices have lagged the run-up in oil prices. Annual profit gains could run around 13%, so the share price looks quite reasonable at 18 times next year's earnings.

For high-yield stocks, electric companies are the group I'd favor. Duke Energy (DUK), which serves the Carolinas, offers a sterling balance sheet, 8% projected annual earnings growth and a 3.7% yield. At $59, more than 14 times earnings and close to a 52-week high, its strengths are widely recognized, but Duke remains an attractive safe haven.

As for bonds, Treasury issues can't be beat for income and security--and municipals are great if you're in a top tax bracket. The most interesting choice, though, are TIPS--bonds that get adjusted for inflation. TIPS pay a real return in cash. Their principal value also rises in line with inflation. Inflation-adjusted savings bonds, known as I bonds, are an even better deal (see the cover story on page 72). I recently went to www.savingsbonds.gov and bought a $500 bond. Best of all, I was able to pay for it with my Visa card, so I'm hoping to get some frequent-flier miles along with my inflation protection.