updated 2/22/2009 5:09:56 PM ET 2009-02-22T22:09:56

This week, Washington will get another chance to prove to Wall Street it means business.

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Investors are expecting details on the Treasury Department's plans to fix the financial industry. The questions they want answered: How the government will decide which banks are healthy enough to be saved, how their toxic assets will be priced and how officials will convince private investors to buy them.

President Barack Obama's administration has yet to galvanize confidence on Wall Street. Last November's 11-year trading low of 741.02 for the Standard & Poor's 500 index has not yet been breached — but it could be if the government fails to show the market that its efforts are working and tell them more help is on the way, said Phil Orlando, chief equity market strategist at Federated Investors.

"We could be down 50 percent from here over the next couple of quarters depending on how much Washington disappoints us," Orlando said. "We're in this freeze right now. We need something to break this ice jam. Right now, Washington is the only one that has the power to break this jam."

So far, the multi-trillion-dollar efforts by the Federal Reserve, Treasury Department, White House and Congress have provided only short-lived bursts of optimism in the stock market. Investors, having gotten burned by buying on rumors and selling on news, are now refraining from any major moves until they see reliable, sustained data showing that the economy and financial system are getting back on track.

"They're not going to become optimistic until they see these plans we spent so much money on start to work," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors.

It's been a rough couple of weeks for stocks:

  • The Dow Jones industrial average is at its lowest level since October 2002.
  • Five Dow stocks are trading below $10 a share — General Motors Corp., Citigroup Inc., Bank of America Corp., Alcoa Inc. and General Electric Inc.
  • Only about 100 of the 500 stocks in the Standard & Poor's 500 index are up for the year.
  • After suffering its worst January ever, the S&P 500 is on track for its third-worst February.

Stocks are so weak because, simply, the economy is not stabilizing and no one knows when it will.

Last week, more companies revealed worse-than-expected results and forecasts. Government data showed the economy is still sliding. Investors grew more skeptical about the effectiveness of the $787 billion stimulus package signed into law. A foreclosure relief plan was met with doubt. And they fretted over not knowing how the Treasury Department intends to repair the financial system.

Because of these fears, people pulled money out of their stock mutual funds. According to TrimTabs, outflows from funds invested in stocks totaled $8.6 billion in the week ended Wednesday, up from $8.5 billion the previous week. Those were the biggest weekly outflows since the second-to-last week of 2008, when outflows amounted to $11.4 billion.

Instead, investors have been pouring what's left of their money into safe havens — particularly gold. The precious metal surpassed $1,000 an ounce on Friday, approaching the record $1,038.60 it reached in March 2008.

Treasury Secretary Timothy Geithner will have to give the market this week sufficient insight into his plans, and help them figure out whether the industry's most worrisome players are going to survive. Citigroup and Bank of America plummeted last week on worries that the two banks would need to be nationalized.

"A lot will depend on what's in the plan. Having been disappointed once before, we're not going to make the same mistake again and bid it up on confidence, because we don't have any confidence right now," Orlando said.

Economic data will also come into focus on Wall Street, particularly now that earnings season is winding down. This week's reports include the S&P/Case Shiller home price index; January reports on sales of new and existing homes; a January report on durable goods orders; and another estimate of fourth-quarter gross domestic product.

It's possible that in a few weeks, investors will start seeing the signs of recovery th'reey hoping for — which in turn could help ease the pressure in many corners of the capital markets.

"It's a vicious circle now, but it could become a virtuous cricle with positive feedback," Johnson said.

But market participants are still coming to terms with the fact that any economic recovery will be a long and difficult one.

"We went on a borrowing binge. We're going through a process of deleveraging the U.S. economy," Johnson said. "The best we can hope for is that we'll muddle through."

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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