Interest-rate push brings out the bears

The bears have taken to the streets of southern Manhattan - mainly because interest rates have risen and are probably going to rise again. This is the analysis of several key Wall Street-watchers who argue that, even after the downturn the market has experienced during the past three to nine months, stocks are still overpriced in relation to bonds. The increase in interest rates makes the accumulation of cash or cash equivalents a more attractive option.

Although

the hike of the prime rate last week to 12 percent - the second increase in three weeks, with more expected - had been anticipated, it had an unsettling effect on the battered stock market. Institutional selling has picked up speed.

The Dow Jones industrial average closed the week at 1,132.22, down 32.67 points since March 30 and at its lowest level in more than a year. The Dow is down 154.42 points since hitting a high of 1,286.64 on Jan. 6. Though the Dow appeared to stabilize Friday, some analysts still see a decline below the 1,100 level.

The past year has been a time of overblown expectations about corporate profits and underblown concern about federal deficits, says Ronald A. Glantz, chief investment officer of Paine Webber Mitchell Hutchins Inc.

Mr. Glantz argues that corporate earnings estimates by most brokerage firms have been too high over the past year. Most earnings estimates for 1984, he says , are still too high and will cause ''a lot of disappointment'' among investors. Conversely, the yield on bonds is increasing almost every day. With interest rates rising and bond prices dropping somewhat, fixed-income holdings look better and better.

Glantz points out that the economy was cushioned from interest rate rises last year but that in the first few months of '84 a wave of new borrowing demand has been driving rates up. He says that from year-end '82 to year-end '83, business borrowing amounted to $4.9 billion, which represented a compound annual growth rate of only 1.8 percent. But for only the first 12 weeks of '84, businesses have borrowed $24 billion - a 42 percent compound annual rate. Consumer borrowing was also mild during '83 compared with this year, he notes.

This is fodder to fuel the much-feared ''credit crunch'' and to drive up interest rates further. Deficits - both the US budget deficit and the US trade deficit - are also big factors. Glantz sees the three-year, $115 billion budget reduction package as offering only ''$50 billion in genuine reductions.'' And the trade deficit, he says, is in effect the way the budget deficit is being financed. The price that is paid: higher interest rates.

''The argument that there is not going to be a crowding out is false,'' Glantz says.

The only development that will put real pressure on the government to reduce the budget deficit, he says, is the prospect of mortgage interest rates going up two or more percentage points. ''Then the administration cannot argue that there is no relationship between the deficit and interest rates.''

Suresh Bhirud of First Boston notes that, despite the fact the median price of stocks has dropped 22 percent since the correction began, ''the stock market is still overpriced in relation to the bond market.''

Thus far, Mr. Bhirud says, interest rates have been rising because of inflationary expectations. He agrees with Mr. Glantz that capital spending is pressuring credit markets.

''It's very difficult to see a decline in interest rates unless the recovery slows down,'' Bhirud says. ''It will be at least two to six months before this situation changes, and I think that until then the market will be suffering from cyclical pressures. The market is vulnerable to another 100-point correction.''

These two firms and a number of others continue to recommend a bearish investment strategy of accumulating cash and putting money into short bonds and cash equivalents. Glantz has recommended that institutions keep only a quarter of their portfolio in equities and make that a ''very defensive portfolio'' with , perhaps, some utility stocks and some consumer nondurables.

Bhirud argues that even if a technical rally occurs in the days ahead - a rebound from the large drop last week and since early January - ''it won't be sustained.'' He notes that institutional cash levels are still too low to fuel a new major bullish phase.

''Eventually things will change,'' Bhirud says. ''Inflation is low and at some point the correction will pave the way for a major bull market. But I don't see it for at least six months.

''Until then,'' he counsels, ''stay in cash and make no new commitments.''