Dow Afternoon Report: Average Ignores Cisco's Plunge

Dow Afternoon Report: Average Ignores Cisco's Plunge

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.

The Dow Jones Industrial Average is up, even as Cisco has plunged 12% on a weak earnings report and Federal Reserve Vice Chairwoman Janet Yellen is on Capitol HIll for her confirmation hearing to become Fed chair.

As of 1:35 p.m. EST the Dow was up 42 points to 15,863. The S&P 500 was up six points to 1,788.

Cisco this morning reported weaker-than-expected sales in its last quarter and warned of disappointing revenue and earnings for this period. The company said revenue rose to $12.1 billion, below analyst expectations of $12.35 billion. Cisco guided for full-year earnings per share of $1.95-$2.05, lower than analyst expectations of $2.10 and possibly a decline from last year's $2.02. The hit to the stock would have likely been greater had Cisco not announced a new stock buyback authorization of $15 billion.

While Cisco is a $113 billion behemoth and the 10th-largest tech company in the U.S., the outdated way the Dow is structured means Cisco's drop isn't having a real effect on the overall average. The Dow is structured as a price-weighted index so that companies with higher stock prices have a larger effect than companies with small stock prices. Cisco, with its $21 stock price, is the smallest Dow stock by weight. Visa is the largest, with a $199 stock price, even though it is basically the same size as Cisco. The Dow is worthless; you should follow the S&P 500 for a real idea of how the market is doing.

The big reason the Dow is up today is Yellen's confirmation hearing before the Senate Banking Committee. Yellen indicated in prepared comments she favors continuing the policies of current Chairman Ben Bernanke, which means a continuation of the Fed's zero interest rate policy, as well as its large-scale asset purchases. Yellen wants to see a self-sustaining recovery before the Federal Reserve eases up, saying: "A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy."

One interesting comment that came out of the question-and-answer session was that Yellen believes that the problem of too-big-to-fail banks is "among the most important goals of the post-crisis era." She stressed that she backs higher capital requirements, especially for large banks.

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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He owns shares of Cisco Systems. 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