So much for optimism.

Early in the week, Dirk Van Dijk, chief equity analyst at Zacks Investment Research, noted that second-quarter earnings reports were looking better than expected, which might give timid investors some confidence.

Moreover, the price of oil dropped significantly for a couple of days.

But alas, the bottom that some were starting to feel gave way to another bummer of a week in the stock market.

Try this for a local proxy: Fastenal, one of the best companies to own in America for the past 20 years, reported early Friday that second-quarter earnings rose 26 percent, slightly better than expected. And the fast-growing, Winona-based retailer of fasteners and other equipment to the construction industry was fairly bullish about recent productivity and market-share gains.

Fastenal's stock price was knocked down more than 3 percent Friday.

It's tough to get a break in a fearful market. And it was dominated Friday by speculation that the nation's two biggest housing lenders may need federal help, more bad news about strapped consumers who can't roll over their debt anymore and big lenders who still may have more mortgage-related debt to write off.

"Let's face it, we're in a recession," said Bill Frels, chief executive of Mairs and Power Funds of St. Paul and a 45-year veteran of the investment trade. "All we have is negative news about the mortgage market, the capitalization of the big banks and the dire energy situation. There's a lot of gloom and doom out there."

At the margins, the stock market is driven by greed and fear. And we're deep into Fear Country.

At times like this, individual-company fundamentals count for little.

Concerned sellers have driven down the S&P 500 index of America's largest companies more than 20 percent since the highs of October.

"For the most part, we're in a tough period that's going to drag on for a while," Frels said. "I don't think we will have a quick snap-back. This economy was built on cheap energy, and there's a wrenching readjustment taking place."

The Dow Jones industrials briefly sank below 11,000 for the first time in two years Friday.

Investors were not assuaged by comments from Treasury Secretary Henry Paulson, who said the government's focus is ensuring that Fannie Mae and Freddie Mac stay afloat as currently constituted, dismissing reports in the New York Times that the government may place the battered mortgage wholesalers and insurers in conservatorship.

The huge government-chartered companies have fallen sharply in recent days on concerns about their stability. Wall Street is worried that a collapse of the two financiers would cause further shock to the financial system and trigger more losses to banks and brokerages that have significant holdings of mortgage-backed securities.

Fannie Mae and Freddie Mac, public companies that have lost more than two-thirds of their value since October and the popping of the real estate bubble, hold or guarantee about $5 trillion worth of mortgages. Their troubles are just the latest depressing turn in the year-old credit crisis that has shown little sign of ending.

Meanwhile, short sellers, who profit when stocks go down, continue to have a field day. Fundamental investors are befuddled.

"I don't know if this is the final capitulation or just more of the same headwinds," said Roger Sit, chief executive of Sit Investment Associates. "The [S&P 500] is down 23 percent. Historically, it takes a year to come out of a bear market. I wouldn't be surprised to see a tug of war in the market for the rest of the year.

"Right now, it pays to have more cash than less in the portfolio, and we're more defensive in nature. We don't like the financials or consumer stocks right now, but we know that somewhere down the line we're going to have to get back into financials. Because when those companies pop, they're going up 20 or 30 percent."

Rick Moulton, equity market strategist at Riverbridge Partners, expects the market to finish in negative territory this year. He also expects an eventual price reduction of energy stocks, which have been bid up hugely by speculative investors. When that starts, probably late this year or early next, the economic outlook will improve and the stock market will have commenced a northward run.

Frels, who invests largely in Minnesota companies, said he's buying Wells Fargo and U.S. Bancorp for their attractive dividends, and on the belief that they will lead the pack when the recovery arrives.

If past is precedent, long-term investors with diversified portfolios who buy during the lean times through dollar-cost averaging strategies will be amply rewarded.

Neal St. Anthony • 612-673-7144 •