Election Elation on the Street

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Companies are bedeviled not only by the slump in the U.S. economy but also by tough competition from abroad. Foreign firms have captured 21% of the U.S. steel market and 28% of American car sales. Moreover, the surprising strength of the dollar is intensifying the threat from overseas. The decline in the U.S. inflation rate has helped bolster foreign confidence in the value of American currency. In the past two weeks the dollar has reached record highs against the French franc and the Italian lira. As a result of the dollar's rise, imports have grown steadily cheaper to American buyers and U.S. exports more expensive to foreigners. The Commerce Department reported last week that the U.S. trade deficit hit a record $13.1 billion in the third quarter.

Even in the face of this bad news, many economists believe that Wall Street's optimism may be somewhat justified. As interest rates drop and lower inflation boosts purchasing power, more and more families will be able to afford the homes, autos and appliances that they have been forgoing for three years. Says Norman Robertson, chief economist for Pittsburgh's Mellon Bank: "Once we pull out of this recession, I think there could be a sharp burst of consumer spending."

Although rising unemployment is tragic for those losing jobs, the layoffs have made many companies more efficient. As a result, productivity has risen sharply. Jack Lavery, chief economist at Merrill Lynch, predicts that corporate profits may rise by 16% next year and 26% in the first quarter of 1984.

Slowest to recover will be the capital-goods companies that produce the materials and machinery for building and equipping new factories. Since American industry is operating at only 69% of its capacity, it will be a long time before many firms think about expanding. Otto Eckstein, chairman of the Data Resources economic consulting firm in Lexington, Mass., forecasts that capital spending will fall by 5% this year and 4% more in 1983.

Despite the mixed economic signals, some financial analysts believe that Wall Street is in the early stages of its longest and strongest bull market in history. They point out that the Dow average when adjusted for inflation is no higher now than it was in the late 1930s. By that standard, stocks are still way undervalued. David Bostian, who heads his own Wall Street investment management firm, predicts that the Dow could eventually reach 1400 to 1500. Other market watchers are more restrained. "This surge makes me wonder how long it can go on,"says Robert Fomon, chairman of E.F. Hutton. "I think it will continue, but you have to expect a correction at some point." Says Stanley Shopkorn, a managing director at the Salomon Brothers investment banking firm: "We could see this market go up another 100 points or just 100." as easily Nagging we could doubts see it about drop the by economy's future keep most analysts from making hard predictions. The bulls of Wall Street are confident that a rebound is on the way, but they are far from certain how robust—and lasting—that certain how ro recovery will be. —By Charles P. Alexander. Reported by Adam Zagorin/New York