Financial markets are supposed to equal the sum of the thinking of millions of investors - from megabuck portfolio managers to suburban penny-stock tinkerers.
If that is true, then millions of investors have been thinking some pretty dour thoughts this year. The bond market's chronic weakness may be translated as: ''We fear rising interest rates and a return of high inflation.'' The stock market, sharing those same worries, adds this concern: ''A recession may be in the offing.''
To hedge against either eventuality, professional money managers and many individual investors have been focusing on high-quality stocks and medium-term (no more than seven years) government bonds. But even this is done with extreme caution - evidence of which is the depressed states of both bond and stock markets in the face of continuing good economic news.
The Dow Jones industrial average closed Friday at 1122.57, down 9.83 points since June 29.
First Boston Corporation market analyst Suresh Bhirud says he doesn't expect to see a turnaround in the market until there is a peak in interest rates. This will not come, he says, until it is clearly demonstrated that the recovery will continue and that inflation will not return. It could be ''another year,'' he says, before the bond market accepts the fact that inflation has been tamed. By that time, he says, high real interest rates ''may kill the expansion.''
Yet there is plenty of evidence to indicate that the inflation rate of around 5 percent a year and the steady economic expansion will remain on track: The federal deficit is being treated seriously. Both a Federal Reserve policy that promotes low inflation and a White House policy that promotes business growth via tax cuts remain in effect. And barring a political upset, these should continue into the late '80s.
Nevertheless, it can be unnerving trying to buck the trend of the lackluster bond and stock markets. What's an investor to do? The best answer seems to be: Stay away from anything questionable - precious metals, commodities, gee-whiz technologies. Stick with quality in investments.
If you are shifting money from one stock to another - or into or out of stocks and bonds - keep in mind that many Wall Street-watchers today view the market as behaving in a ''two tier'' manner. On one tier are blue-chip stocks. On the other tier are all the rest. In recent months, both tiers have fared poorly - the blue chips losing 15 percent of their value since January, and the secondary stocks down 30 percent or more since June of '83.
The top tier is where you want to be, many market analysts contend. The optimists say the top tier is poised to recover some of the loss sustained since January and may boom beyond that over the next few years. That six-month decline , they say, has been a normal ''correction'' in what otherwise is a bull market for the blue chips. Even those who don't buy the theory of a long-range boom in blue chips contend that the top tier is nevertheless the best place to be with your investments.
For the second tier, things are more grim. These stocks, as tracked by broader measuring devices such as the Standard & Poor's 500, the New York Stock Exchange composite index, or the Value Line average, have been hard hit. Many contend these have entered a bear market.
David M. Kalman of W. H. Newbold's Son & Co. brokerage firm in Philadelphia measures the weekly advances and declines on the NYSE to track the broader market. In most of 1984, this has shown twice as many stocks declining as advancing.
Mr. Kalman argues that diverging paths for blue chips and secondary stocks were to be expected. Over the past 10 years, he says, secondary NYSE stocks, American exchange stocks, and those sold over the counter have soared by an average of 600 to 700 percent. Their decline, which began in May 1983, was long overdue. On the other hand, the Dow has had a mean of only 900 over the past 18 years and is not far above that today.
Thus the safest investment haven for your money right now is probably in either government bonds or blue-chip stocks. When it comes to secondary stocks, be choosy. A company with a good earnings record and sound management may still be a good buy, but minimize your risks. If you have access to the Value Line, you might consider a company only with a high ''safety rating.''
George M. Ferris Jr., chief executive officer of the Ferris & Co. brokerage firm in Washington, observes that an economic climate of steady growth, low inflation, and level - or declining - interest rates makes bonds and good-quality stocks the best long-term investments that are available today.
The fuel for long-term growth, Mr. Ferris says, will be a healthy economy, increasing ''confidence that interest rates and inflation won't shoot through the roof,'' and a high amount of money pouring into the stock market from pension funds and individual retirement accounts.
Ferris points out that pension funds have a current value of $1 trillion and that this will grow to $3 trillion to $5 trillion by the turn of the century. He also notes that only one-quarter of the 82 million families eligible for IRAs have signed up for these and that as more and more do so the pool of money that needs to be professionally invested will expand enormously.
In a disinflationary environment, he says, alternative investments, such as real estate, commodities, and precious metals, simply cannot compete with high-quality stocks.
Interest rates Percent Prime rate 13.00 Discount rate 9.00 Federal funds 11.00 3-Mo. Treasury bills 9.95 6-Mo. Treasury bills 10.40 7-Yr. Treasury notes 13.69 30-Yr. Treasury bonds 13.48 Source: Bank of Boston