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Brutal selloff on Wall Street

Dow down almost 367 points, its third worst day of the year, on fears about credit and housing sector, earnings, record-high oil prices, slide in dollar, what the Fed will do next.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Stocks tumbled Friday as record-high oil prices, more problems in the bank sector and slower corporate earnings growth revived worries about an economic slowdown.

The Dow Jones industrial average (Charts) lost around 367 points, seeing its third-biggest point loss of the year, its worst since the steep selloff in early August in the midst of the credit and mortgage market mess.

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The decline Friday left the blue-chip indicator at its lowest point since Sept. 17, the day before the Federal Reserve cut interest rates for the first time in 4 years, triggering a rally that was cut short this week.

The S&P 500 (Charts) index lost 2.6 percent and the Nasdaq composite (Charts) gave up 2.7 percent.

Disappointing earnings from Caterpillar, Honeywell and others exacerbated concerns about weak third-quarter profits. Meanwhile, Wachovia became the latest financial services firm to reveal how the credit and mortgage market crisis had hit its profits.

Oil prices ended lower Friday, but not before hitting an all-time high of $90.07 a barrel in electronic trading. The dollar fell to a new record low against the euro and also slipped versus the yen. Treasury prices surged, as investors sought safety in the comparably safe haven of bonds.

The declines reflect a certain shifting in perspective, said Ram Kolluri, president at Global Investment Management.

"We have fully come to the queasy realization that the U.S. economy may slow down considerably," Kolluri said.

He said that this realization has been driven by the ongoing problems in the real estate market, rise in gold and other commodity prices, and especially $90 a barrel oil - all of which is hitting Corporate America, and the consumer.

Consumer spending fuels roughly two-thirds of economic growth, and after a lot of predictions, actually does seem to be slowing substantially. (Full story)

Stocks have had a tough week as investors digested a batch of lackluster earnings reports and tried to put into context what the run up in oil prices could mean for consumer spending and the economy.

"We're seeing this kind of selloff because of where oil is and because the banks are reminding people that we have a lot further to go before we get to the bottom of the real estate issue," said John Forelli, portfolio manager at Independence Investments.

Forelli said that this marks a change in thinking from earlier in the month, when a rash of billion-dollar writedowns from big banks seemed to give investors a "the worst is behind us" perception.

The run up in oil prices was also significant in that it revives fears about whether it will drive up inflationary pressures enough to limit the Federal Reserve's ability to cut interest rates further, even if the economic growth deteriorates enough to warrant more cuts.

"You started the day off with traders' superstitions because of the anniversary of the 1987 crash and meanwhile you've had a bunch of companies come out talking about the weakness of the economy," said John Wilson, chief technical strategist at Morgan Keegan. (For more on the '87 crash, click here.)

Wilson said these were among the factors giving investors a reason to retreat after pushing the Dow and S&P 500 to record highs last week.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by more than 5 to 1 on volume of 1.79 billion shares. On the Nasdaq, decliners topped advancers 5 to 1 on volume of 2.41 billion shares.

Stock declines were broad based, with all 30 Dow stocks slumping.

Bank of America (Charts, Fortune 500)'s earnings disappointed investors Thursday - and Friday it was Wachovia (Charts, Fortune 500)'s turn. The nation's fourth-largest bank said earnings fell from a year ago, due to the credit market turmoil. Wachovia also said revenue rose slightly from a year ago. Both earnings and revenue were short of forecasts.

Dow components Caterpillar (Charts, Fortune 500), 3M (Charts, Fortune 500) and Honeywell (Charts, Fortune 500) also reported results Friday that disappointed investors.

Heavy-equipment maker Caterpillar reported that quarterly earnings rose versus a year ago, but results were short of estimates. The company also cut its fiscal 2007 outlook.

Honeywell reported higher quarterly earnings and revenue and boosted its fiscal 2007 outlook. However, earnings were short of estimates and investors took a "sell the news" response, sending shares lower.

3M slumped 8.6 percent and was the Dow's biggest loser after reporting higher quarterly earnings that topped estimates on higher sales that missed estimates. The company, considered a bellwether for the U.S. economy because of its range of businesses, also raised its fiscal 2007 earnings forecast.

However, investors may have been bothered by news that 3M is cutting prices on its films for LCD television screens, one of its most profitable ventures, AP said.

Dow component McDonald's (Charts, Fortune 500) reported higher quarterly earnings that met estimates on sales that missed forecasts.

Schlumberger (Charts) reported higher quarterly earnings that topped estimates, but investors sent shares lower on weaker North American results, AP reported.

SanDisk (Charts) reported lower quarterly earnings that topped estimates, but also reported gross margins, a key measure of profitability, that were short of forecasts, sending shares of the flash-memory-drive maker lower.

Other tech earnings were more positive. Late Thursday, Google (Charts, Fortune 500) reported higher quarterly sales and earnings that topped estimates.

Also after the close Thursday, Advanced Micro Devices (Charts, Fortune 500) reported a lower-than-expected quarterly loss.

With 24 percent of the S&P 500 having reported, earnings are currently on track to have fallen 0.1 percent from the same period a year ago, according to the latest Thomson Financial figures, which combine reported and expected earnings. Even if overall earnings growth ends up a few percentage points higher, as is typical, the third-quarter will still represent the worst quarterly growth in more than 5 years.

Also adding to the stock turmoil Friday: the 20th anniversary of Black Monday, the second biggest market crash in history, when the Dow lost 22.6 percent in a single day for a loss of more than 508 points.

A decline of roughly 23 percent off of Thursday's market close would be equivalent to nearly 3200 points.

The Dow's 508-point loss was the third worst in history. The worst on a point basis was Sept. 17, 2001, when the stock market resumed trading after having been closed for four sessions after the 9/11 terrorist attacks.

The biggest market crash in history happened on Dec. 12, 1914, when the Dow lost 24 percent, according to Dow Jones indexes. On that day, the New York Stock Exchange reopened after having been closed for most of the previous 3-1/2 months due to increased selling at the onset of World War 1. (See charts for details.)

U.S. light crude oil for November delivery fell 87 cents to settle at $88.60 a barrel on the New York Mercantile Exchange. Oil briefly hit a record of $90.07 a barrel in electronic trading.

The year-long run up in oil prices has accelerated during the last few weeks due to supply concerns, the weak dollar and worries about an escalating conflict between Turkey and Kurdish rebels in Iraq.

Treasury prices rallied, lowering the yield on the benchmark 10-year note to 4.39 percent from 4.49 percent late Thursday. Bond prices and yields move in opposite directions.

COMEX gold for December delivery fell 30 cents to settle at $768.40 an ounce. Top of page