(MONEY Magazine) – We've seen some impressive rallies in stocks recently, and while that's welcome news, it's too early to cheer. There is still plenty of room for concern about the market and the economy.

In terms of the economy, we've had a double dose of bad lately: Government data were revised to show that the economy shrank for three consecutive quarters in 2001, two more than originally reported, and the Federal Reserve acknowledged a risk of weakness when it decided in August to change its bias on interest rates, while stopping short of easing rates again.

Compared with the bionic growth and market returns of three years ago, the new reality is frustratingly unpredictable and fraught with combinations of risks once unimaginable. The risk of a major domestic terrorist attack. The risk of an epidemic of corporate accounting scandals. The risk of waging war with Iraq without the support of many of our longstanding allies. The fact is, we've entered a new era of risk, a zone that for many investors is unfamiliar, uncomfortable and--unfortunately--unlikely to change anytime soon.

The good news (for now, at least) is that the economic recovery appears to be on track. "The recovery is still moving along," notes Merrill Lynch chief economist Bruce Steinberg. "It's just moving along a lot more slowly than we would like to see."

Steinberg blames the delay on the turbulence in stocks and the corporate scandals, saying the combination has really "taken the wind out of the recovery." But we still have growth, he adds, noting that retail sales have been strong the past two months and that the boom in housing continues to defy expectations. Overall, Steinberg predicts that the U.S. economy will grow as much as 3.5% by the end of this year. "Not great," he says, "but not bad."

Bruce Bartlett, an economist with the National Center for Policy Analysis, also believes we're on track for a modest recovery. He points out that "unemployment is at a relatively good level, considering the state of the business cycle. Incomes are rising. Housing prices are rising. People are refinancing their mortgages. Interest rates are low."

Economist Lakshman Achuthan says a double-dip recession seems unlikely this year. His group, the Economic Cycle Research Institute, produces the Weekly Leading Index, a gauge of such leading indicators as stock and commodity prices, bond spreads, jobless claims, mortgage applications for home purchases, longer-term interest rates and money supply (see the chart on the following page). Achuthan tells me that the index currently looks similar to how it looked a decade ago: "There was a big double-dip/triple-dip debate back then, and this index did slip, recognizing the anemic pace of the early-1990s recovery but not forecasting recession in the end."

Continued weakness in stocks, however, could derail these forecasts for a steady, albeit slow, economic recovery. Vince Farrell, chairman of asset management firm Victory Capital, thinks the market bottomed in July. But he doesn't see big changes in the major indexes between now and the end of the year. It'll be a long time before we return to the market highs and double-digit returns of 2000, Farrell adds. "I think we'll revert more toward the very high single digits--maybe 10%--that stocks on average returned during the 20th century." Farrell cautions that even a subdued scenario would be at risk if housing prices or the dollar were to fall precipitously. The other major factor that could pressure the markets: more corporate scandals.

Which brings us to Washington. In a time of so much uncertainty, both parties have failed to provide the leadership that investors and consumers need to see before confidence in corporate America can be restored. The president's economic forum in Waco, Texas in August was a good first step. The president looked engaged and scored political points, despite criticism of the forum as too limited, shallow and brief.

The Bush administration has missed a number of opportunities to demonstrate economic leadership, and the president's economic team has committed a few outright blunders. Part of the problem has been Treasury Secretary Paul O'Neill; although he has displayed refreshing candor at times in the job, O'Neill continues to misspeak at the most inopportune times--most recently causing a disruption in Brazil's financial markets. It's a quality ill-suited to the role of the head of Treasury.

Securities and Exchange Commission chairman Harvey Pitt has also come under fire. Critics say his background as a lawyer for the accounting industry makes it impossible for him to do his job objectively. But the truth is, Pitt's experience and unrivaled ability to understand the arcana of 21st-century securities law and financial reporting make him the best person to head the agency right now. Unfortunately, in this case as in so many others, the administration is badly losing the p.r. war.

The well-noted absence of the Vice President is also a problem. Yes, Dick Cheney's former employer, Halliburton, is being investigated by the SEC for its accounting practices. But there's no real evidence yet of any impropriety on Cheney's part. The longer he continues to hide from the media, however, the more he feeds the appearance of wrongdoing.

The President himself seems late to the game on corporate governance. He delivered his first major address on the topic in July, but it was quickly criticized for a lack of scope and specifics. Granted, this is an election year, and we are well into the political silly season. Yet that's no excuse for the White House to offer up a halfhearted agenda for reform. The stakes are too high, and the risks are too potentially disturbing.

What should the Bush administration do? Take its efforts on corporate reforms to the next level. The President can join the growing list of business and policy leaders calling for stock options to be expensed. He can also pressure the Justice Department to step up its investigation into Enron. It's been nearly a year since the government's formal inquiry into Enron began; granted, the Enron mess is complicated, but there's no excuse for the probe to have yielded so little after so much time. The President must make a commitment to ensure that any corporate executive who commits fraud goes to jail for a long time--and he must make sure that the Justice Department fulfills that commitment. The public won't be satisfied by perp walks unless they turn into real prosecutions.

And the President can hold another economic summit, this time inviting Democrats and a more balanced group of participants that includes some of the millions of Americans now looking for work. Talking with real working Americans would get the President off the defensive and shift the focus to positive solutions. The reality is that Democrats have offered few new economic proposals. The exception is Sen. Joe Lieberman, who wants to freeze portions of the Bush tax cuts passed last year--a highly unlikely outcome with congressional elections so close.

Yes, there are real and hard-to-manage risks facing the economy and the markets, making this an unsettling period for investors and consumers. But our political leaders can diffuse at least part of the uncertainty by ensuring that real reforms are in place to prevent corporate crime--and making sure that those who've committed fraudulent acts that have robbed so many Americans of their retirement money are sent to prison and stripped of their fortunes. Over the past year, investors have been forced to question the integrity of Wall Street and corporate America; they shouldn't be forced to question the integrity and commitment of their leaders in Washington.

Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Moneyline.