Market upcurrent hints gain in economy

Just what is the stock market saying? Interest rates have recently risen - and may rise more - but the Dow Jones industrial average performed relatively well last week after a bad start. Why?

Many Wall Street-watchers consider the market a barometer that predicts the future weather of the economy. Because investors are trying to anticipate how their stocks will be doing three to six months out (depending on the type of investment), market performance in April essentially forecasts what the economy will be doing between July and October - and perhaps beyond.

On the face of it, the rise in the prime rate was bad news for the market, which performed poorly after it was announced. But some of the more professional hands had taken those higher interest rates into account some time ago: The 150 -plus-point skid in the Dow since early January, some analysts say, was in anticipation of the rise in interest rates.

''The market dropped, interest rates rose,'' notes Philip B. Erlanger of the Hartford-based Advest brokerage. ''The market told you interest rates were going to rise. Now, I think the market is looking to something else.''

Concurring in the view that the rise in interest rates was anticipated, Rao Chalasani of Prescott, Ball & Turben in Cleveland thinks the poor performance of the market up until last Thursday was ''the residual reaction to the reality of these interest rate increases.''

The upturn late last week, both analysts argue, is a barometer of better times ahead for stocks. The Dow has not slipped under its late February low point (reaching 1,114.95, during the day, Feb. 23). It closed Friday at 1,150.13 , up 17.91 points for the week, most of the gain having come on Thursday. The type of news that moves the markets up or down appears to be improving:

* The economy is cooling off - but seems in no danger of a premature recession: Inflation remains moderate; unemployment is level; the money supply dropped last week.

* First-quarter corporate earnings are strong - and they continue to be high-quality earnings, without the inflationary inventory and asset gains that occurred in the late 1970s.

* At least for now, the huge financing needed to carry off the recent mega-mergers of oil companies is behind us. Merger money now flowing out to investors who have tendered their stock should soon show up in the markets (both the equity and the credit markets) as new purchases.

* Revised estimates of the federal budget deficit have fallen from $200 billion to around $160 billion, because of higher tax revenues (as the economy improves) and lower outlays on such social needs as unemployment benefits. Congress, moreover, appears to be nearing completion of a three-year deficit reduction package that closes loopholes and taxes such non-essentials as liquor.

Mr. Chalasani notes that because of higher interest rates and rather weak prices in the bond market, the yields of bonds are somewhat more attractive than those of common stock; this will give equities some competition. But he lists some things bolstering equities: The cash holdings of institutional money managers are at 9 or 10 percent; telephone switching of mutual funds into money market funds from equity funds has slowed; and individual retirement accounts should swell this week with last-minute purchases made to qualify for 1983 tax deductions.

In each instance, Chalasani notes, some money will go to fixed-income investments - but a great deal will make its way to the stock market.

''These are very solid underpinnings,'' he says. ''We are bullish,'' although he is hesitant to say what the market will do when it begins to anticipate the economy beyond the November election.

Mr. Erlanger, adhering to contrarian thinking, is likewise bullish. In the past few weeks, he says, he's detected abnormally bearish sentiment. He recommends ''a 100 percent long (in stocks) position for people with a contrary opinion - there are just too few bulls.''

Erlanger maintains that the three-month slide in the market reflects the historical pattern of bull-market ''corrections.'' These corrections, which take the speculative wind out of the market, show a retracing of one-third of the market's rise. He says the January-to-the-present slippage ''fits this pattern perfectly.''

Erlanger's investment advice to clients: Put 100 percent into equities, choosing among select technology stocks, perhaps some auto stocks, and oils.

Chalasani recommends more investment in regional banks, housing goods, autos, and restaurants. Capital-goods stocks are also good buys, he says, as are selected high-tech stocks, since a great deal of the high-tech sector is geared to serving capital spending needs.

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