In a emporium where hopes for a government-led recovery are countered by fears of worsening earnings and household data, what could finally free stocks to soar—or tumble further?

By Ben Steverman

Watch full size video:

For the U.S. standard market, all the fathom and beldam of the gone by three months has signified—not much. Like a dangerous animal in a cage, greater indexes be under the necessity paced posterior portion and forth not more than the same trading range in that existence in this world.

It’s not as if the market is acting calm or boring. Stocks, and especially particular stocks and sectors, be possible to bounce wildly from day to day. But the bouncing hasn’privately really gotten equities anywhere. Standard & Poor’s equity strategist Alec Young noted Jan. 29 that stocks are "boxed into a near-term skilled in commerce range." Despite several attempts, the broad S&P 500 director can’t seem to dip in this world 740 to 800, while it can’t rise above 940 to 1,045.

A deteriorating economy and terrible incorporated earnings have stopped any major rallies in their tracks. But hopes for a new Presidential Administration and for an economic recovery in the second half of 2009 regard kept stocks from sinking lower.

So far, the federal regulation has provided investors with some downside protection. "Anytime in that place is a move from Washington, the market moves up," says Quincy Krosby, essential investment strategist at the Hartford (HIG). "Then, the gains immediately evaporate."

The Federal Reserve has multifid interest rates to near zero and the Fed’s monetary committee related Jan. 28 it may bribe long-term U.S. Treasuries to ameliorate remedy credit markets. The U.S. Congress continues to weigh a spacious economic stimulus package, with the House of Representatives approving its $825 billion interpretation of the plan Jan. 28. The Obama Administration, meanwhile, is reportedly studying the idea of a new Federal Deposit Insurance Corp.-managed "bad bank" that would buy up toxic estate from financial institutions.

Demonstrating the hopes multiplied market participants put in the government, PIMCO bond fund manager Bill Gross offered his own prescription in his monthly note on the firm’s Web site, published Jan. 29. He said the government needs to find ways to hold the prices of assets like municipal bonds or commercial mortgage-backed securities.

At a time like this, "the benevolent palm and fingers of government is required and Keynes is reincarnated in an attempt to quid the dike by way of fiscal spending and imaginative monetary policies that support asset prices," Gross writes in his February prospect.

But while government help can spark optimism in the market, those gains be able to fade quickly. The problem is that many of the government’s most of high standing plans are still being developed. The measures that have already been implemented—such as low interest rates or ultimate year’session financial bailout—haven’t yet stabilized the economy or fiscal system. "We need to see it happen," says Uri Landesman, head of global growth at ING Investment Management (ING). "It’s one thing to discuss a bill in Washington and another to see it put in action."

Moreover, many of the measures actuality debated are unprecedented. No one knows if they will work. "There’s no proof in the pudding," says Richard Sparks of Schaeffer’s Investment Research. Without expressive if these measures will be lucky, investors are stuck simply hoping for a recovery.