Campaign crosscurrents lap at the market

To many mavens on Wall Street, Ronald Reagan's return to 1600 Pennsylvania Avenue was a foregone conclusion. The stock market had ''digested'' the election , as one analyst put it. And when Mr. Reagan stumbled in last week's debate with Walter Mondale, the stock market was already slipping south for reasons of its own. But the President's poor showing may have added grease to the skid.

''Reagan's performance cast some doubt on the election outcome and created another area of uncertainty in the market,'' says Robert Nurock, publisher of the Astute Investor, a Paoli, Pa., newsletter.

One indicator after another has shown that the economy is growing more slowly. On Friday, reports of a drop in wholesale prices (indicated by the producer price index) and a third-quarter fall in retail sales added another measure of confirmation. But as Mr. Mondale mentioned in the debate, there are now a few whispers about a possible recession.

There is less certainty that bad news is good for the market - that's how Mr. Nurock puts it. He detects a shift in investor sentiment that ''bad news may actually be bad.''

By Wednesday, the Dow Jones industrial average had dipped under 1,160, losing 62 points since mid-September. But with many issues hitting their lowest marks in three months, bargain hunters stepped in, halting the decline. The Dow Jones closed Friday at 1,1190.69, up 8.16 points for the week.

''First, they said the economy was too hot,'' says James McCarthy, a technical analyst at Paine, Webber, Jackson & Curtis, in New York. ''Now they're saying it's too cold and analysts are cutting earnings estimates.

''So whom do you please?'' Mr. McCarthy wonders.

Lower earnings reports have caused investors to place some sell orders, but earnings at the International Business Machines Corporation came in slightly above expectations. Last week, this Pied Piper of the market reported third-quarter earnings of $1.59 billion, or $2.60 a share. Even with this 22 -percent quarterly earnings rise, some analysts were mildly disappointed that it came on only a 13-percent increase in revenues; revenues rose 16 percent in the first half. So sellers hit Big Blue over the earnings report but the stock recovered late in the week.

At Paine, Webber, Mr. McCarthy advises investors to hold IBM or even buy it on a decline. He says, ''I think IBM could test the old highs of $135, and I'm looking at $155 in the intermediate to long term (three to six months).''

Stockholders have been distracted by lower earnings estimates, McCarthy believes. ''But eventually they're going to focus on the bond market and favorable interest rates,'' he says.

Interest rates have come down in the last month. Theoretically, as rates fall and bonds offer less competitive rates, the stock market rises.

Last week, interest on three-month Treasury bills dipped below 10 percent for the first time since June. Nonetheless, bond dealers are concerned about the federal government's borrowing needs. A flood of new Treasury securities will hit the market over the next few weeks; several offerings have been delayed by wrangling in Congress over raising the national debt ceiling.

The money supply as measured by M-1 grew $1.5 billion in the week ending Oct. 1 - well within the Federal Reserve Board's target range. This gives the Fed room to ease credit restrictions. But many bond traders are still questioning whether the Fed has settled on a policy to bring down interest rates.

Meanwhile, the market's pullback below 1,200 fits in nicely with Mr. Nurock's forecasts. Since August he has said the Dow was due for a correction to 1,170. ''The Dow is in the process of making a significant low,'' he says. ''In the next week, I think we'll see the low of the fourth quarter.'' He picks 1,136 as the bottom.

From there, the Nurock scenario is as follows: a rally centered on the election. Then a brief intermission. A short decline. And finally, a rousing rally crescendo to bring the curtain down on the fourth quarter.

McCarthy basically concurs: ''We're back in an oversold state and primed for a good bounce. The market may have to build a base first - for a week or so. But by the end of the year I think we'll see new high in the Dow.''

Where to invest in this would-be rally is open to debate.

Stay with the blue chips - particularly Big Blue - McCarthy counsels. He expects some of the other ''high-quality high-tech'' stocks to do well. And auto stocks still look strong, he says.

Nurock does not think the rally will be broad enough for stocks of both large and small capitalization companies to rise. ''I think the public will join in this rally. The public is a significant part of secondary stock activity.''

Interest rates Percent Prime rate 12.5-12.75 Discount rate 9.00 Federal funds 10.00 3-Mo. Treasury bills 10.28 6-Mo. Treasury bills 10.68 7-Yr. Treasury notes 12.30 30-Yr. Treasury bonds 12.11 Source: Bank of Boston, other banks