Waiting for stocks to rally? Don't hold your breath

"We thought it might be a good time for a surprise move by the Fed — to have raised rates by a quarter-point to signal that they are serious about fighting inflation," noted Michael Farr of money management firm Farr Miller & Washington.

Stocks have not fully priced in the current downturn, warns Brian Belski, U.S. sector strategist at Merrill Lynch. The fact that consumers' finances are weakening, coupled with the fact that consumer spending accounts for two-thirds of economic activity, suggests that this recession will be worse than "average," Belski wrote in a recent report.

While the nation's economy, as measured by gross domestic product (GDP), has yet to suffer any quarterly declines, many Americans are experiencing a frightful financial pinch due to the cash-drain caused by higher gas prices and the ongoing decline in the value of their homes.

Credit crisis' problems linger

The credit crisis also has stuck around much longer than expected. The seeds of the financial crisis, which surfaced last summer and appeared to hit a crescendo in mid-March when investment bank Bear Stearns nearly imploded under the weight of losses tied to bad mortgages, are still sowing uncertainty.

By this time, investors had hoped that banks exposed to bad loans would have accounted for all their losses. But the full extent of the losses is still unknown. Investors are bracing for more bad news when banks release their second-quarter earnings reports in the coming weeks. Despite having already written down hundreds of billions of dollars in losses, analysts say, banks and brokerages are expected to report additional sizable losses.

"We still don't know what inning we are in (in the credit crisis)," Trennert says. "By now, you would have thought the ninth inning would be wrapping up."

The weak state of the financial sector is a key reason the broader market is struggling to gain its footing. Financials in the Standard & Poor's 500-stock index have suffered more than $1.2 trillion in losses since its Oct. 9, 2007, high, compared with a loss of just $263 billion in the 2000-02 bear market, S&P says. A year ago the financial sector represented the largest chunk of the index based on stock valuations, but it now sits third at 14.4%, behind tech and energy.

So steep have been the declines in major financial stocks (Citigroup closed Wednesday at $16.84, down 68% from its 52-week high) that comparisons with the tech-stock crash earlier this decade are being made.

"People accused me of being nuts when I went on TV the past few months to say that there is nothing in the rulebook that says a 'Citi-puke' can't go to single digits or that many names would go under," says Gary Kaltbaum, president of Kaltbaum & Associates. "Not many are battling me anymore. The same thing happened in the tech bear of 2000. No one would ever have believed a Lucent would go to $2 or WorldCom would go bust."

Kaltbaum, who is preserving capital by holding cash, is steering clear of financials deemed "cheap" by bottom fishers.

The collapse of General Motors' stock price, 77% off its 12-month high to a 54-year low, is another sign of just how badly the high price of gas has hurt consumer spending. This once bluest of blue chips is struggling to survive as drivers turn away from the gas-guzzling SUVs that it has relied on for most of its profit in recent years.

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