The Dow Jones Industrial Average is currently at 10,435, which represents a decline year to date of 9%.  The Nasdaq, while just getting back to a level of 4,000, is negative by only 2% year to date.  The Nasdaq is still 23% below the March highs of more than 5,000.

The stock markets have been moving higher ahead of the Federal Reserve meeting on June 27.  It is speculated the Fed will leave interest rates unchanged because there are signs of the economy weakening.   The next Federal Reserve meeting is scheduled for late August.

With earnings season beginning in July and the perceived “no-action” by the Fed, investors have started to invest in stocks again.  Trimtabs.com, a stock market research firm, estimated that over $8 billion dollars flowed into stock funds last week.  Clearly, the recent market gains have made investors and institutions more comfortable adding money to the markets.

While it is unknown what the Fed will do in June or August, it is clear the economy has shown some signs of slowing.  The Fed will continue to raise rates until the economy has slowed to a level that it views as non-inflationary.

Sectors that are favored at the onset of a slowing economy are: consumer non-cyclicals, such as food and drug stocks; technology stocks with superior earnings growth; and investments that pay a good income rate such as Treasury bonds and REITs.  Investments that generally have done poorly during economic slowdowns are: cyclical stocks, such as automotive, manufacturing and chemical stocks; luxury goods manufacturers; retail stocks; and consumer-oriented technology.