Why Tech's Holding the Dow Back
The Dow Jones (INDEX: ^DJI) is down 0.45% again today. On its own, that's not a terribly huge loss, but when you consider the index has sunk more than 6.5% since the close of the first trading day of May, a picture of building misery forms.
What's holding back the Dow and other markets today? Tech isn't helping. The Nasdaq-100 (INDEX: ^IXIC) is down 0.87%. IT heavyweight Cisco (NAS: CSCO) is among the Dow's biggest losers, seeing a 1.25% drop. The reasoning is pretty simple: Tech spending looks weak, and that portends very bad things for the future of the global economy.
What's wrong with tech?
In a column just yesterday I advised investors to not look too closely into the continuing string of tech earnings failures from the likes of Cisco and Dell (NAS: DELL) , as those companies' poor earnings could be attributed to their own poor execution rather than broader threats to IT spending. In particular, I felt it was necessary to pay close attention to NetApp's (NAS: NTAP) earnings last night. NetApp is a company that's shown compounded sales growth of over 17% across the past five years. Simply put, this is a company that's been executing, and if it was projecting weak sales, there truly is an IT slowdown around the corner.
Well, NetApp reported last night, and it was bad. The company had a pretty good last quarter, seeing sales still rise 12.8% over last year. However, the low end of its guidance for next quarter hints at sales falling as low as 4% year over year. Ouch!
It's hard to ignore NetApp's cautious outlook, and the IT environment is definitely starting to feel the way it did last summer, when markets plummeted as global growth fears were focused on the U.S. debt stand-off. That situation was resolved, and now instead we see companies being cautious thanks to Europe and its continuing crisis with its weaker countries' debt problems.
This could take a while
The unfortunate reality is that we might need to buckle up and prepare for a rash of poor reports, not just across the technology space, but other industries as well. Last summer markets eventually managed to rebound, but not before some truly heart-pounding late summer months. The best advice at times like this is to buy high-quality companies which will be able to expand their market share in times of crisis and come out the other side of economic worries no worse for the wear. That's the recipe for long-term, market-crushing results.
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At the time this
article was published Eric Bleeker owns shares of no companies listed above. The Motley Fool owns shares of Cisco Systems. Motley Fool newsletter services have recommended buying shares of Dell. The Motley Fool has a disclosure policy.
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