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Anxiety about a European banking crisis and another batch of weak U.S. economic cues tested the resolve of bargain hunters in the U.S. market, sending stocks down for a fourth straight week.

Money fleeing Europe in search of safe—or safer—harbors drove the yield on U.S. 10-year Treasuries to depths not seen since the 1960s and briefly below 2% Thursday, while gold climbed for a seventh straight week to another record. U.S. stocks have fallen 16.5% in less than a month, and on Friday the crop of stocks plumbing fresh 52-week lows swelled to about 600—versus just a dozen braving new highs.

At this rate, the stock market is quickly becoming both an economic predictor and a self-fulfilling prophecy. The correction shows traders ratcheting up the odds of a U.S. recession, but stocks’ tense selloff—and the anxious headlines it creates—further scare consumers and corporations into reining in spending. Recent data showed industrial production and retail sales stabilizing in July, but these took the economy’s pulse before the willies set in. More recently, the Philadelphia Federal Reserve reported a sharp drop in business activity as August began, with its index falling from 3.2 in July to a negative 30.7 and toward levels typically seen before or during recessions.

The good news: Investors’ expectations are rapidly decimated, and marked-down stocks are trading at just 13 times companies’ projected profits. But the bad news is how logic can be overwhelmed in a market swept up in emotion, and Wall Street’s profit projections can still come down. Dell (ticker: DELL) shares slipped 10% midweek after it lowered its revenue target amid weak government and corporate spending, while Hewlett-Packard’s (HPQ) market value shrank by a fifth, or about $12 billion, after it cut its profit forecast and detailed plans to leave the computer business.

What can stop this negative feedback loop? Forceful policy support ranks high on bulls’ wish list, with our Fed chairman scheduled to speak this Friday—exactly a year after he rescued the market with a second round of quantitative easing, or QE2. Talk about a happy anniversary: Some 60% of global money managers surveyed by BofA Merrill Lynch are now counting on QE3 should the Standard & Poor’s 500 fall below 1100. That’s up from just 28% a month ago.

Ben Bernanke will need help from his stingier European counterpart. Alas, the European Central Bank tightened credit in the summer of 2008, and again this year, even as its weaker economies struggled. Last week, data showed Germany’s economy slowing sharply, and European stocks fell 6.1% for their fourth straight weekly loss. In the last “stress test” of 90 European banks, the median coverage ratio—the amount of loss provisions set aside against defaulted assets—was about 38%, compared with 66% among U.S. banks earlier this year, notes Joseph Kalish, Ned Davis Research’s senior macro strategist. CLSA strategist Christopher Wood thinks economic growth in Europe could deteriorate more than in the U.S. as a result of “recent monetary tightening, relative currency strength and dramatic fiscal tightening in much of the periphery.” A pause in Europe and the U.S. won’t spare China’s export-driven economy, which has been growing at nearly a 10% clip (Source: Barrons Online).