Wall Street battered, day 3
Record oil prices, Mideast violence, signs of a slowing economy hit markets; Dow falls 395 points in 3 days.
By Jessica Seid and Alexandra Twin, CNNMoney.com staff writers

NEW YORK (CNNMoney.com) -- Stocks tumbled for the third straight session Friday amid surging oil prices, heightened violence in the Middle East and worries about corporate profits.

The Dow Jones Industrial average (down 106.94 to 10,739.35, Charts) sank 1 percent, leaving it up just 0.2 percent for the year.

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The world's most widely watched stock market gauge has tumbled 395 points since Tuesday's close.

The broader Standard & Poor's 500 (down 6.09 to 1,236.20, Charts) index slipped 0.5 percent, and the Nasdaq composite (down 16.76 to 2,037.35, Charts)slid about 0.8 percent Friday, dragging them further into the red for the year.

The S&P 500 is down nearly 1 percent in 2006, while the Nasdaq has tumbled 7.6 percent so far this year.

The rout started Wednesday as fighting between Israel and Lebanon's Hezbollah escalated, sending oil soaring to record highs. Traders worry that rising oil could feed inflation and slow economic growth, hurting corporate profits.

The selloff is part of a broader pullback that has pummeled markets since late May. After hitting a 2006 high on May 10, the Dow has lost 7.8 percent of its value, first on worries about a slowing economy and rising interest rates, and now on global concerns.

"We're seeing textbook market reaction to political hostilities," said Fred Dickson, chief market analyst at D.A. Davidson & Co. "It's like traveling through a Rocky Mountain thunderstorm looking for holes between the clouds, and there aren't many."

At the same time, investors are worried about second-quarter corporate profits, with the first big batch of companies due next week.

Monday brings earnings from Dow stock Citigroup. Results are due later in the week from Intel, IBM, Microsoft, Google and a host of other influential companies.

Solid earnings growth is expected for the quarter, though the results could be secondary until the geopolitical unrest is perceived to have stabilized.

"I think the declines we've seen are temporary and mostly in response to the Mideast situation," said Ron Kiddoo, chief investment officer at Cozad Asset Management. "If we get some positive developments in that area next week, the (stock) selling can probably wash out."

What moved?

Declines were broad based, with 22 out of 30 Dow stocks falling

General Electric (down $0.56 to $32.11, Charts) reported higher quarterly earnings that met expectations. But the Dow component also forecast current-quarter results at or beneath analysts' forecasts, and the stock sank 1.7 percent.

The Dow's aerospace and defense components suffered setbacks. Honeywell (down $0.98 to $37.01, Charts) lost 2.6 percent, Boeing (down $2.34 to $77.25, Charts) fell 3 percent and United Technologies (down $2.62 to $58.81, Charts) dropped 4.3 percent.

Other big losers included General Motors (down $0.85 to $27.47, Charts), Merck (down $0.79 to $36.15, Charts) and Wal-Mart Stores (down $1.11 to $43.05, Charts).

GM rival Ford Motor (Charts) lost 2.7 percent after Moody's Investors Service cut its ratings on the automaker deeper into junk status.

Book chain Borders Group (down $0.72 to $17.56, Charts) warned late Thursday that second-quarter and full-year earnings and sales will not meet Wall Street forecasts, sending shares lower.

Major airline shares took a hit from record high oil prices, which directly impacts jet fuel prices. American Airlines parent AMR Corp. (down $1.74 to $23.25, Charts) and United Airlines' UAL Corp. (down $1.86 to $26.76, Charts) both tumbled almost 7 percent.

On the upside, shares of Petco Animal Supplies (up $8.44 to $27.89, Charts) jumped over 43 percent in unusually active Nasdaq trading after the retailer agreed to be bought by two private equity companies for around $1.7 billion in cash.

And Forest Laboratories (up $6.00 to $44.40, Charts) added 15.6 percent. On Thursday, a judge ruled that its patent on the antidepressant Lexapro was valid and was infringed by a generic version proposed by Teva Pharmaceutical Industries (down $0.01 to $30.50, Charts).

Market breadth was negative. On the New York Stock Exchange, losers topped winners two to one as 1.71 billion shares changed hands. On the Nasdaq, decliners beat advancers by a similar margin on volume of 1.81 billion shares.

Retail sales disappoint

June retail sales fell a surprising 0.1 percent, the Commerce Department said Friday morning. The drop reflected the impact of surging gas prices on consumer spending. Economists surveyed by Briefing.com thought sales would rise 0.4 percent.

Separately, the University of Michigan's July consumer sentiment index fell to 83 versus expectations of a rise to 85.5.

Light crude oil for August delivery hit $78.40 early Friday, surpassing the record from a day earlier. The price then backed off but still closed 33 cents higher at $77.03 a barrel on the New York Mercantile Exchange, another closing record.

COMEX gold for August delivery jumped $13.60 to settle at $668 an ounce.

Treasury prices inched higher, lowering the yield on the benchmark 10-year note to around 5.06 percent from 5.07 percent late Thursday. Bond prices and yields move in opposite directions.

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