New York ? A 390-point drop in the Dow Jones industrial average Friday sent the index careening to its lowest level in four years part of a broad market collapse that, by some measures, makes the current bear market the worst since World War II.

Analysts predicted further declines ahead, saying a host of economic, political and emotional forces are converging to push investors to the sidelines.

Dan Walsh holds his head as prices fall in the Chicago Mercantile Exchange's Dow Jones futures pit. The Dow dropped 390 points Friday, leaving the index at its lowest point since 1998.

“We’re in a ‘shoot first, ask questions later’ market,” said Brian Sayers of CIBC Oppenheimer in Dallas. “It’s a whole cross-section of fear.”

The market was haunted by a couple of factors Friday, said Bryan Piskorowski, a market analyst for Prudential Securities. One, Johnson & Johnson acknowledged it was being investigated by the Food and Drug Administration, apparently related to allegations of problems with its Eprex drug, a treatment for patients with low red blood cell counts one of the healthcare giant’s most popular medicines.

The company’s shares sank nearly 16 percent. “Johnson & Johnson is the debacle du jour,” said Piskorowski.

Also Friday, the Standard & Poor’s 500 Index underwent a major restructuring, eliminating companies not based in the United States. That created a flood of selling and buying because mutual funds attempt to replicate the S&P 500 in their portfolio. One result: The New York Stock Exchange had its second-busiest day ever.

But neither of those factors could explain the sweeping collapse during Friday’s trading session.

Historic decline

The tote board at the New York Stock Exchange reflects the 390.23-point drop in the Dow Jones industrial average.

The Dow’s 390.23-point decline was the seventh-largest point loss in its history and represented a 4.6 percent drop in just one day. The Dow is now off more than 20 percent for the year.

Friday’s freefall left the Dow at 8,019.26, the lowest closing price since late 1998 and 216 points below where it landed after the 9-11 terrorist attacks last fall.

Each of the 30 companies that comprise the index fell. Roughly 3 billion shares were bought or sold.

The Nasdaq Composite Index, which sunk more than 80 percent since peaking in early 2000, was pounded again Friday. It fell 37.90 points, to close at 1,319.05, off 2.8 percent.

Before the current rout, the worst post-war bear market occurred in 1972-74. At that time, the market’s total value fell 44.2 percent, from $1.05 trillion to $585 billion, according to Donald Straszheim, one of the country’s best-known economists and former head of research at Merrill Lynch.

But with Friday’s plunge, the market’s current collapse appears to have topped that dubious record. The Wilshire 5000, considered the most comprehensive market measurement, has fallen 45.2 percent in value since peaking March 24, 2000.

“Misery loves company,” Straszheim said. “We’ve been here before.”

It’s an ominous sign for investors, because after the mid-1970s debacle the market didn’t mount a meaningful recovery until the early 1980s.

No stopping it

Analysts and other experts have been somewhat confounded by the feverish dumping of stocks. For instance, there have been wide bipartisan calls in Washington to crack down on abusive accounting and fraudulent financial reporting to little effect.

Since President Bush pledged a major crackdown on corporate fraud earlier this month, for example, the market has fallen 13.5 percent.

Furthermore, the market plunge continues even as U.S. economic indicators have turned relatively positive.

In one example, the government said Friday inflation is tamed, running at a rate of just 1.1 percent annually. It’s a heartening trend because it gives the Federal Reserve room to stimulate the nascent economic recovery.

“The lack of inflationary pressures means the Federal Reserve will be able to leave short-term interest rates unchanged until the recovery gains a bit more momentum,” said Mark Vitner, economist for the First Union/Wachovia banking organization. “That means the first rate hike may not come until sometime in early 2003.”

But if low interest rates and dormant inflation have historically been an irresistible elixir for stocks, the rampant accounting scandals and questionable earnings reports have prevented them from working their magic this time around.

Earl Foster, a Miami investment manager, says part of the problem is stocks are still overpriced at current levels. Judged by prices compared to earnings, also known as the P/E ratio, the market “still appears rich,” he said in a recent report, adding: “Many sectors of the stock market are still burdened with excessive valuations.”

Virtually the only niche of the market that has been rising is gold. Gold is typically viewed as a “defensive” investment. In other words, it represents an inherent value at a time when stocks or the dollar which also has been falling are seen as inherently risky.

Shaky investors

Fred Coupe, who heads research at O’Higgins Capital Management in Miami Beach, Fla., said his organization liquidated stocks at the beginning of the year and went into gold-mining stocks. “We had a very defensive position,” he said. Except for gold-mining stocks, he’s keeping the firm’s capital in cash.

“We cannot complain,” Coupe said.

But there was plenty to complain about in Friday’s numbers. The fallout from Johnson & Johnson dragged down other health-care stocks. Merck & Co. closed down 1.2 percent even though its second-quarter earnings were in line with expectations.

Other blue chips took it on the chin. Procter & Gamble Co. dipped 7.4 percent, or $5.93, to $74.46. 3M Co. lost $7.77, or 6.7 percent, to close at $108.88.

Microsoft fell 3 percent, or $1.55, to $49.56, after the world’s largest software maker scaled back its profit and sales outlook for the current year.

The decline in such Wall Street pillars in the past few weeks indicates how shaky investor confidence is.

“The first stage of the bear market focused on the excesses of the bull market, such as technology and telecom,” said Fuller of William Blair. “Now sectors that are typically more defensive, like healthcare and food, are getting hammered.”