Market conditions good - investors yawn

Some straws blow by in the October wind, telling you about the investment climate: a tame money supply, low fears of inflation, a slower but still vigorous economy, downticks in the prime interest rate.

What could be better for the stock market, that famous barometer of faith in the future prosperity of corporate America?

What, indeed?

Even with those nearly ideal conditions, the stock market has been having trouble. For most of last week it was in a slump, falling back to a two-month low on Wednesday. Things improved slightly Thursday but were lackluster on Friday.

The Dow Jones industrial average closed the week at 1,182.53, down 24.18 points in five sessions.

Data on the economy are encouraging. Hence there could be continued good earnings for American corporations, and that means good stock performance.

Moderating interest rates are encouraging, too: Safe, fixed-income investments (Treasury notes, money market accounts, certificates of deposits) become less of a runaway best seller. The equity-building ''total returns'' (dividends plus appreciation) on stocks begin to look more attractive.

And the inflation outlook still looks encouraging. The nation's basic money supply (M-1) fell $2.4 billion last week, slightly more than many Wall Street economists had predicted. That leaves M-1 slightly below the middle of the Federal Reserve Board's target growth rate of 4 to 8 percent. Hence the Fed may not have to tighten up the money supply soon to prevent a resurgence of inflation.

That looser money should also make credit conditions favorable and could even prompt another downward nudge in interest rates. The federal funds rate dropped in recent days, and the Federal Home Loan Bank Board reported that the average interest rate on mortgages in early September fell slightly below 15 percent for the first time since June.

Nonetheless, few analysts expect interest rates to slip dramatically. They point to continued borrowing needs by the federal government. Some believe interest rates are just dipping temporarily before ratcheting upward again. Data from the manufacturing sector indicate the economy continues to grow moderately, forestalling concern about a credit-consuming boom or an impending recession.

Still, investors are disturbed because the rates are extremely high by historical standards and as measured against the low rate of inflation.

Despite all that, overall the stock market still seems weak.

According to some theories, however,that weakness is actually a good thing, for it may be a sign of the ''intermediate-term correction,'' or the ''retracing ,'' that a big boom such as occurred in August needs to gather itself up for a bigger push next year.

Technical analysts Richard Yashewski and Joseph Barthel of New York's Butcher & Singer brokerage say the market needs more of a ''downside bias'' during the fourth quarter of '84 if it is to be ''positive in the first half of the year.''

At present, Mr. Yashewski says, the market doesn't look positioned for a move into the 1,300-to-1,500 range unless it moves down toward 1,150 first. Looking at market performance of late, that seems an easy move to make. By Yashewski's reckoning, that dip would be a sign of investors ''discounting'' a mild recession in '85 or early '86. In other words, don't worry too much about weakness in the stock market.

Looking beyond the market at the overall investment climate, Ernest Kiehne, manager of the Value Trust mutual fund at Legg Mason Wood Walker of Baltimore, sees a nearly ideal climate for equities.

Mr. Kiehne describes his approach to stock selection as ''Graham & Dodd-plus, '' referring to the fundamental-evaluation approach of Profs. Benjamin Graham and David Dodd, who taught at Columbia University. Even with its portfolio of undervalued stocks, the Value Trust fund, with $85 million in assets, ranked No. 2 of 250 growth funds through Sept. 30.

Kiehne favors a variety of stocks with low price-earnings ratios and revenue growth of 8 to 10 percent a year. Current selections include some that have been shunned by many: regional banks, textiles, paper and wood products, coal.

Among industry groups that Mr. Barthel of Butcher & Singer favors are aerospace, soft-drink, computer-service, container, and appliance companies. He would use any dip in quality stocks to accumulate some favorites. But secondary stocks, he contends, may be in a ''long-term bear market.''

Interest rates Percent Prime rate 12.75 Discount rate 9.00 Federal funds 10.38 3-Mo. Treasury bills 10.51 6-Mo. Treasury bills 10.95 7-Yr. Treasury notes 12.36 30-Yr. Treasury bonds 12.15

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