July 19, 2002: 7:19 PM EDT

NEW YORK (CNN/Money)

The Dow Jones industrial average sank to its lowest level in nearly four years Friday in a selloff that only further highlighted the drastic loss of confidence in the stock markets in the United States.

It was the seventh-biggest point drop ever for the world's most widely watched stock average. Mixed earnings results from big-name companies, news of a government investigation at Johnson & Johnson, and worries about a possible bankruptcy filing by WorldCom gave already jittery investors more reasons to head for the exits.

"It shows you how much confidence has been shattered," Morgan Stanley senior economist William Sullivan told CNNfn's Street Sweep program. The sharp declines in stock prices in recent weeks are likely to erode consumer confidence, which could in turn hurt the economy's prospects in the second half of the year, he said.

The Dow tumbled 390.23 to 8,019.26, bringing the 30-share index down 1,360 points over the past two weeks and leaving it at its lowest since October 1998. It also closed 216 points below its Sept. 21 close following the first full week of trading after the Sept. 11 attacks.

The Nasdaq composite index tumbled 37.80 to 1,319.15, capping a 4.5 percent loss for the week; it's down 35 percent for the year. The Standard & Poor's 500 index sank 33.81 to 847.75 and it's down 27 percent in 2002.

The Dow has now fallen nine of the past 10 sessions and for nine straight weeks. Both the Nasdaq and S&P are at their lowest levels since the first half of 1997.

"There is just no good news out there right now, and people are not willing to get involved in the market going into a weekend," Bryan Piskorowski, market analyst at Prudential Securities, told the Associated Press. "You've got a buyers' strike going on."

If stocks don't snap back in the second half of the year, the U.S. stock market could end 2002 with its first three-year losing streak since 1939-1941.

Indeed, after rallying following Sept. 11, the markets topped out in March, and have been careening downward ever since: The Dow is down 25 percent since then; the S&P 500 is down 27 percent, and the Nasdaq is down 32 percent. And the continuation of selling on Monday, following the seventh worst point-loss in Dow history, is doing little to reassure investors that the worst is over.

People worry that, with $7.7 trillion knocked off U.S. market capitalization since March 2000 ($750 billion in the past week alone!), the selling will bleed into the economy, not just snuffing the recovery but sending the country into a deflationary episode like the one Japan labors under. Or like the United States strained under in the 1930s.

The fear breeds selling, the selling breeds more fear. Some economists have even begun to talk about how the Fed could step in and cut rates to try and stanch the bleeding -- while at the same time they worry that for the Fed to do that would only stoke the market's fears.

This script is starting to look familiar, says James Padinha, economic strategist at Arnhold & S. Bleichroeder. It's starting to feel like 1998, when fears ran high that financial crisis would seize up the economy. "It's just eerie," he said. "We have exactly the same kind of thing going on."

In the latter half of 1998 a debt crisis in Russia and hedge funds, which were almost as profoundly overleveraged as they were mispositioned, sparked a global flight to safety in the markets. It was a slow growing panic -- you would think it was going to get better and it just kept getting worse. As the market deteriorated investors began fearing not only that the United States would slip into recession, but that it would enter its first deflationary episode since the Great Depression. The Fed cut rates three times in an attempt to shore things up.