Concern over interest rates keeps the year-end bulls at bay

Wall Street is apprehensive over interest rates. This apprehensiveness may run deep, or it may be a means of discounting future problems. Complaints heard around the Street: The traditional year-end rally has not come along in earnest; selling is the prevalent mode of transacting business; interest rates could remain high or go higher in 1984.

Although most analysts agree this is still a bull market, the market has slipped lower by the day. On Dec. 16 the Dow Jones industrial average closed at 1,242.17, down 17.89 points for the week. These declines have been mirrored by declines in the Dow Jones transportation index. The downturn may be brief (on Friday the Dow was actually up 5 points), or it could run well into '84.

Market-watchers say that much depends on the future course of interest rates. Henry Kaufman, Salomon Brothers' chief economist, indicated last week that interest rates should hold fairly steady into 1984 and may increase late in the year. High interest rates have an adverse effect on stocks. His was not a dire prediction. But since investments in equities are done with an eye to the future , there seemed little reason for investors other than contrarians to go out and buy stocks.

Although Mr. Kaufman is widely followed, especially by those tracking fixed-income issues such as government bonds, his is not the only view. Some economists believe interest rates could remain moderate - maybe even drop - because of economic developments that would act to decrease the federal deficit.

* Oil prices could decline slightly, because of a mild winter and structural changes in oil demand.

* Strong corporate and individual earnings could contribute more tax revenues to government coffers without a tax increase.

* Foreign investment money could continue to flow into the United States.

''During the first quarter of 1984,'' Cigna Corporation economist Edward Guay notes, ''we expect US and world interest rates to be well below the late summer peaks.'' Besides the possibility of a break in oil prices and of a continued influx of foreign investment, Mr. Guay says that ''a surprising reduction in the government deficit during early 1984 may contribute to the expected decline.''

But beyond the spring, Guay says, investment spending and rising demands for business loans could push the rates upward. That rise would persist into 1985.

How to make an investment decision based on predictions about interest rates? Apparently you can either believe these predictions or discount them.

''The fear (of higher interest rates) could be greater than the actuality, ''says William Raftery of the Smith Barney, Harris Upham brokerage in New York. ''The stock market is always looking six months ahead.''

William LeFevre of Purcell, Graham & Co. notes that there is plenty of good reason to buy stocks in today's economic climate, interest-rate considerations notwithstanding.

''A bond is a dead instrument once you buy it,'' Mr. LeFevre says. ''You only get your money out of it. But a stock is a piece of business. And business is showing better than it has in the past year, even two years. Earnings and dividends are up. If people would go back to fundamentals they would see that this is the real reason to buy stocks. Earnings and dividends are good.''

He notes that since the bottom of the bear market last year, the stock market has been abnormally sensitive to interest rates, following the cue of the bond market up or down. Now, Mr. LeFevre says, ''I'm not sure we should accept the popular scenerio about interest rates.''

But most investors and their advisers continue to see the rates as a menacing specter on the horizon. E.F. Hutton analyst Philip Roth attributes the poor performance of the market the past few weeks in part to the stiff competition from the bond market.

Mr. Roth also notes that the skyrocketing market at the beginning of 1983, and the subsequent ''correction'' from midyear to the present, prompted an unusual amount of tax selling (in which issues are sold at the end of a calendar year to qualify for the capital-gains rate for tax purposes). When the DJIA dropped below a short-term ''support level'' of 1,255 (with transportation below 600), Roth says, automatic selling kicked in. But Roth sees an oversold market as ripe for a rebound.

Before that rebound can come, Merrill Lynch analyst Hans Schueren says, the divergence between blue-chip and lower-capitalization stocks must be resolved. At least for the time being, he says, aligning this divergence is going to keep the market in the doldrums.