Rise in interest rates last week put a flutter in the stock market

The stock market acted like a weather vane last week: It swung with interest rates. Thus, early in the week, when it appeared the Federal Reserve Board would not tighten rates and the recent upswing in rates might moderate, the market rose. Later in the week, when interest rates rose and Citibank raised its prime rate to 12 percent, up from 11 1/2, the market fell back. For the week, the Dow Jones industrial average finished with a gain of 8.37 points, closing at 940.96. Volume was heavy all week.

Monte Gordon, director of research at the Dreyfus Corporation, says the market's sensitivity to the direction of interest rates, as well as its susceptibility to rumors, indicates that investors are feeling anxious. "Everything is being measured on a scale of how it will impact interest rates," he explains. Thus, the report on Friday that the producer price index was up 1. 5 percent in August was considered another negative, since it will keep the pressure on the Federal Reserve Board to keep interest rates up.

Mr. Gordon says the Dow may still reach the 1,000 mark, propelled by the large amount of institutional cash sitting on the sidelines. A recent report indicated that mutual funds had 10 percent of their assets in cash. Mr. Gordon says this is also true of pension funds and insurance companies. In fact, any pullback, he says, might be a good time to buy.

Leslie M. Alperstein, senior vice-president and director of research at Bache Halsey Stuart Shields Inc., suggests investors may get that buying opportunity soon. He says Bache has recommended to its clients that they "take a less aggressive" stance in buying stocks, since the brokerage house feels they are already fairly valued.

Mr. Alperstein notes: "Current yields of about 10 percent on one-year Treasury debt and 11 percent on 30-year Treasuries are competing with an average return of 16 percent on stocks. Even though a 5-6 percent risk premium may be normal, it is not suggestive of a clearly undervalued market."

Still another reason that markets have begun to falter is continued uncertainty over the shape of the economic recovery. For example, Kidder, Peabody & Co. says it believes the recovery will be moderate, rather than sharp. Thus, interest rates will not change much from their current levels.

Argus Research Corporation, however, is predicting a "double dip" type of recovery. Argus maintains that business will still go through an inventory adjustment. It notes that the sizable reduction in expenditures -- both by the consumer and business -- has left the inventory-to-sales ratios still too high. Thus, unless the consumer rides to the rescue, inventories will have to be reduced. This in turn could ease pressure on interest rates but squeeze profit margins.

Extremely short-term traders kept their eye on activity last week because the four trading days after Labor Day are supposed to be a good indicator of the direction for the rest of the month. Yale Hirsch, editor of Smart Money, says the indicator has been right 16 out of the last 20 years. The record, he claims , shows that if September is a good month, the rest of the year is bad, and vice versa. When September is a losing month, this barometer has been wrong only twice in the past 12 years.

The economic news last week showed retail sales in August rising, but at a slower rate than expected. K mart Corporation posted a 9.6 percent increase, compared with last August, but Sears, roebuck sales fell 1.1 percent.

In the market last week, gold stocks were active and higher as the price of the precious metal rose. Gold closed at about $650 per troy ounce, up about $20 an ounce for the week.

General Motors was actively traded and off after the company announced it would recall 1,034,000 cars to correct an exhaust circulation problem. The auto companies also indicated that sales declined 22 percent in August compared with last year. Analysts, however, were surprised to see that sales of imported cars likewise fell. Foreign-car dealers said this was because of shortages of the best-selling cars and some recent price increases.

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