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Mike Segar  /  Reuters
Trepidation is more like it after a month that saw the major indexes fall to their lowest levels in 12 years. The Dow Jones industrial average fell for the sixth straight month and is now worth less than half its record high of 14,164.53.
updated 3/2/2009 7:23:16 AM ET 2009-03-02T12:23:16

The arrival of March is unlikely to bring much relief to a stock market battered by bad news throughout February.

Trepidation is more like it after a month that saw the major indexes fall to their lowest levels in 12 years. The Dow Jones industrial average fell for the sixth straight month and is now worth less than half its record high of 14,164.53. All because no one has a clue about when the economy will begin to pull out of recession.

"We're in uncharted waters right now," said Joe Arnold, investment adviser at Dawson Wealth Management in Cleveland. "It's like you have Vaseline on your fingers. People can't quite grasp it."

The pervasive uncertainty has made investors skeptical of the government's attempts to heal the faltering financial system and stimulate the housing market and overall economy. Last week, the market got some answers, including more details on the government's bank rescue plan and its latest attempt to help shore up Citigroup Inc., but that proved not enough to calm investors' nerves.

The government's growing role in the financial sector will remain a top focus for investors for the forseeable future, analysts said, especially as insurer American International Group Inc. is expected to receive more help from Washington. But that focus is almost completely negative, simply because the nation's financial institutions, first hobbled by soured mortgage assets, are now contending with losses due to the recession.

President Barack Obama last week outlined a budget that called for spending up to $750 billion more for additional financial industry rescue efforts on top of the $700 billion Congress authorized last fall. The government also confirmed it will buy preferred shares from banks that can be converted into common shares, and the Treasury Department began to "stress test" the country's biggest banks to determine which might need more capital if economic conditions worsened. The test will use two economic scenarios to measure banks' health, and the process is expected to be done by the end of April.

The government also agreed to increase its stake in beleaguered Citigroup to as much as 36 percent by converting the preferred stock it already holds to common stock. While the conversion will dilute current shareholders' investments, a wider equity base means better protection against future losses.

But investors are still worried that other banks including Bank of America Corp. teeter on the brink of failure, and that their investments could take a major hit if the government is forced to orchestrate another deal like the one with Citigroup.

"The underlying macro fundamentals are all still intact," said Scott Valentin, managing director at Friedman, Billings, Ramsey & Co. "You still have a very difficult operating environment."

And a lending climate that is still far from what the economy needs to recover.

"Credit is the backbone of the economy," he said. "I don't think the banks are going to go out and massively increase lending. ... It's not an environment you go out and make a lot of loans in."

Major Market Indices

And only once some stability returns to the financial sector can the market, and the economy, begin to heal, analysts said.

"Until the financial stocks show some footing, it's going to be very hard for the market as a whole to show any strength," Nicholas Colas, chief market strategist at BNY ConvergEx.

There are a spate of economic readings expected this week that investors will weed through for any signs of hope. Perhaps the most anticipated reports are the Federal Reserve's beige book, its assessment of the economy by region, due Wednesday, and the Labor Department's February employment report, due Friday.

Other reports of note include the Institute for Supply Management's reports on the manufacturing and service sector during February; the Comerce Department's reports on personal income and spending and construction spending; and the Commerce Department's report on January factory orders.

On Tuesday, major automakers will report U.S. sales for February, while retailers will report February sales on Thursday. Also scheduled is the National Association of Realtors' January report on pending home sales, due Tuesday.

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

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