The Market Gives Cisco a No-Confidence Vote

The Market Gives Cisco a No-Confidence Vote

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks opened substantially lower this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average down 1.4% each as of 10:05 a.m. EDT.

This retreat in stock prices comes despite an encouraging report from the Department of Labor, according to which initial jobless claims fell to their lowest level since October 2007, near the start of the credit crisis.

Perhaps the "culprit" is another report from the Department of Labor on the latest Consumer Price Index, according to which the index has increased 2% in the 12 months through July -- the largest increase since February. That figure puts inflation in the range that the Federal Reserve is targeting (although the Fed uses another indicator as its preferred measure of inflation).

Why would this hurt stocks? According to traders' twisted logic, it bolsters the notion that the Fed will begin winding down its bond purchases next month. Add a little political risk, with the threat of a civil war in Egypt, and you have a fine recipe for a drop in stock prices.

Cisco beats, but it's not enough
Yesterday, I highlighted evidence that investor confidence has surged over the past month. Unfortunately, the evidence of a global economic recovery is a lot less clear-cut. Take networking giant Cisco Systems , for example. Yesterday, in commenting on the company's latest quarterly results, CEO John Chambers said:

Last quarter, I described a continued slow recovery. This recovery is more mixed and inconsistent than others I've seen. ... What we see is slow steady improvement but not at the rate that we want. We have to very quickly reallocate resources.

That didn't stop Cisco from beating Wall Street's expectations, earning $0.52 per share versus the consensus estimate of $0.51; revenue of $48.6 billion was in line with expectations. Nevertheless, Cisco is reacting aggressively to a lackluster recovery, vowing to cut 4,000 jobs in the next quarter, or approximately 5% of its workforce.

Investors are responding no less swiftly to Cisco's announcement: The shares fell 10% in yesterday's after-hours session, and they're now down about 7%. With the shares now trading at less than 12 times the estimate for next 12 months' EPS, it's clear the market expects lackluster earnings power from this capital-spending bellwether.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

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Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published