Major Chicago Bank Trims Its Prime Rate to 9.5% : Investing: With lower interest rates and formidable obstacles facing the market, many are left with tough choices about where to put their money.

Many investors have been rooting for the Federal Reserve to drop interest rates, but the central bank’s move Tuesday has left them with some tough choices about where to put their money.

The stock market may be going nowhere fast. Cash equivalents, such as money market investments, aren’t paying what they were. And the bond market remains turbulent, whipped by fears of inflation and unsettled economic and political conditions.

“At this point, there aren’t many pleasant choices,” said Tony Hitchler, president of Brandywine Asset Management in Wilmington, Del.

The stock market has usually been energized by such drops as Tuesday’s cut in the discount rate, which is the rate the Fed charges financial institutions for short-term loans. Since 1914, such drops have on average brought stock price gains of 7% during the following three months, Hitchler said.

But this time the market has some formidable obstacles ahead, such as an unfolding recession and the weak corporate earnings that inevitably will follow. Next month probably will bring a series of corporate earnings jolts that may reverse some of the recent market gains, some investors say.

The Fed’s decision to cut the discount rate brought a welcoming rally from bond buyers, who Tuesday took the benchmark 30-year Treasury bond up $12.50 in value for every $1,000 of face value. But losses in trading Wednesday and Thursday more than eliminated those gains.

Long-term bond rates have drifted down about half a percentage point lately but have seesawed for much of the year. The 30-year Treasury bond has fluctuated between 8% and 9%, for example.

Many individual investors have been far from pleased by what they’ve been seeing. They’ve watched the returns on their money market funds slide to 7.45% today from 8.75% in April, while their 30-year bond fund yields slid to about 7.5% today from 9.15%.

And simultaneously, many have been frightened away from higher-yielding corporate bonds by the collapsing yields in the junk bond area. As a result, money has been pouring into medium- and longer-term government securities, say officials of mutual fund companies.

“We’ve seen heightened, if not record, interest in government securities,” said Neal Litvack, vice president for marketing at Fidelity Investments, the Boston-based mutual fund company. The volume of investment into such funds “is five or six times what it was in the first half of the year,” he said.

Litvack said a large portion of the flow was from money market funds. Three years ago, he added, “a lot of that money would have been going into junk.”

But some observers believe that moving too quickly may be a mistake for individual investors.

An investor who moves from a money market fund, for example, into a bond fund “could get killed if war breaks out and interest rates spike,” said Jane White, a spokeswoman for T. Rowe Price, the mutual fund company based in Baltimore.

John Markese of the American Assn. of Individual Investors, in fact, suggests that the best move at the moment may be no move at all.

“If you were in shorter-term investment for liquidity and safety, maybe that’s where you should stay,” he said. “You can’t pick up much in yield without sacrificing what you were after in the first place.”

He added that rates have come down relatively little and that, in his view, they are unlikely to come down much further unless inflation slows substantially.

Bank One Asset Management, a money-management firm in Columbus, Ohio, has adopted what may be a typical defensive strategy. Braced for a round of bad earnings reports next month, the firm has only 40% of its assets in the stock market, compared to 55% in medium-term bonds and 5% cash.

Mark Pellegrino, the firm’s director of portfolio management, said Bank One was shying from longer-maturity bonds because of the high volatility and making most of its investment in the five- to seven-year Treasuries, now returning 7.6% to 7.8%.

“This is a news-oriented trading environment, where developments on the gulf and the global economic situation are whipsawing prices,” he said. Even with the Fed easing, “we’ve really been reluctant to extend our maturities.”

The interest rate cut also won’t be sufficient to change the outlook of the bearish Mathers Fund, a stock fund that has been 90% in short- and intermediate-term bonds and 9% in stocks since late summer. Henry Vander Eb, the fund’s president, believes that the economy is at a “major inflection point” because of the structural problems caused by the trade and federal budget deficits, and the ills of the banking industry.

The easing of rates seen so far won’t be enough to bring him back into the stock market, because the country “has to pay the piper . . . and it may take another year or so. I don’t think you can correct the excesses of 25 years so quickly.”