Will rising interest rates rain on Wall Street's picnic? So far, the stock market has shrugged off the rain as no more than a summer shower. And even though the bond market has been weak, stocks have merely paused - not faltered. This was true again last week, when the Dow Jones industrial average dropped just half a point, closing at 1,241.69.
The rise in interest rates has so far amounted to about 0.5 to 0.75 percent. Part of this rise can be attributed to the market's anticipation of some tightening by the Federal Reserve System, and part of it to the huge federal financing now going on.
After interest rates fell back from an 18 percent level during 1982 and '83, a rise of 0.5 or even 1 percent may not seem like much. On Wall Street, however, every uptick in rates is viewed with suspicion.
A Shearson/American Express bond salesman in Red Bank, N.J., noted last week that institutions are concerned that the ''trend is in the wrong direction.'' And, he added, ''business is lousy.''
But Wall Street won't become overly concerned about rising interest rates until short-term rates are higher than long-term rates, says Richard J. Hoffman, president of R.J. Hoffman & Co. in West Orange, N.J. Long-term rates are running about 10.8 percent and short-term rates (as reflected by the federal funds rate - the rate at which banks lend overnight money to each other) are 9.5 percent. Thus, Mr. Hoffman, formerly with Merrill Lynch & Co., is bullish. He says, ''This market has felt jittery five different times and each time was a mistake.''
Thomas Stiles, director of research at E.F. Hutton & Co., maintains that the market has already digested the possibility of modestly higher interest rates. He says stocks won't react ''unless rates are going to go (up) a lot further.'' Mr. Stiles concedes that the expansion of price-to-earnings multiples, based on falling interest rates, might be over, but he believes a steady stream of positive earnings reports will keep the market on track.
William Sullivan, Dean Witter Reynolds's money market economist, said he thinks interest rates will rise about 1 percent by October, with the federal funds rate going to about 10 percent. Normally this would indicate that the prime interest rate commercial banks generally charge their most creditworthy customers would be about 12 percent.
If rates rose to those levels, predicted Robert M. Gardiner, chairman of Dean Witter, the market would fall. Over the long haul, Mr. Gardiner says, he is extremely optimistic about the market, noting, ''I'm a buyer of stocks right now.'' Over the short term, however, he believes the market might be ripe for some form of correction.
This view is shared by Bob Nurock, an investment analyst, who says the market might be poised for some downward movement now that it is running out of bad news. ''For that reason,'' he says, ''we are turning even more cautious on the stock market.'' Mr. Nurock believes the Federal Reserve will let interest rates drift higher - which will signal an end to what he considers the first leg of the bull market.
This view is endorsed by Butcher & Singer Inc. The Philadelphia brokerage house warned its customers recently that ''the storm clouds are building and racing closer and closer to the picnic site.'' Within the next few weeks, the firm warns, investors should prepare for a downpour.
Even though he believes the broad market averages may trend down over the next 12 months, Francis Kelly, Dean Witter's senior vice-president and chairman of the investment policy committee, believes there may still be some ''positive surprises'' left for investors. He predicts the key to making money in the market will be catching changes in market leadership.
One change that is taking place is a lot more optimism about oil stocks. Exxon, Mesa Petroleum, Atlantic Richfield, and Standard Oil of Indiana, to name a few, have all been bumping their highs.
Mr. Hoffman says he recommended the stocks on June 1. He feels that oil prices will fall over the next six months as demand for oil rises and the companies start to dish out volume discounts but that once demand is back up, prices will tighten and earnings will rise again. In addition, he notes, ''they are the most under-owned group in the market,'' since so many institutions have dumped their oil holdings.
His favorites in the group are Royal Dutch/Shell Petroleum and Atlantic Richfield. Both companies, he notes, have a lot of oil that cost about $13 a barrel to produce. With selling prices of $29 a barrel, he figures they will thrive even in the current glutted market.
Mr. Gardiner of Dean Witter also likes the oils; he says he's become a buyer of Texaco. ''The stock yields 9 percent,'' he explains, ''so if you get any improvement in the stock price you're going to make money.''
Another market shift last week occurred in the semiconductors, which spurted upward. As Thomas Kurlak, a vice-president at Merrill Lynch & Co., noted in a recent report, the recovery in the industry gains strength every month. He estimates total industry profits will double this year and may double again in ' 84 if the economy continues to gain strength.
Mr. Kurlak's recommendations include Motorola, Advanced Micro Devices, Intel, National Semiconductor, and GCA Corporation. But he also likes Texas Instruments , which lost over 25 percent of its market value when its first-quarter earnings sheared off sharply. Last week when the semiconductors surged, so did Texas Instruments.