Dow Morning Report: Why Isn't Cisco's Drop Making the Dow Crash?
Nov 14th 2013 11:11AM
Updated Nov 14th 2013 11:12AM
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.
Just looking at the movement in the Dow Jones Industrial Average , you'd think that today was just another ordinary day in the bull market, with the average up 25 points as of 10:55 a.m. EST. But within the Dow, Cisco Systems is down more than 12%, as the networking giant reported earnings last night and issued troubling future guidance. With such a big drop, why isn't the Dow reacting more negatively?
For starters, some stocks are rising to offset Cisco's losses. Home Depot and Boeing are both posting reasonable gains this morning. Home Depot climbed 1.5% in reaction to initial comments from Federal Reserve chair nominee Janet Yellen supporting the increasingly common view that interest rates could stay low through 2017. With the home improvement retailer having benefited greatly from rising home prices that in turn depended on easy financing, news of sustained low rates could extend Home Depot's rally even further.
Meanwhile, Boeing climbed 1% despite facing further labor tension as its Seattle-based machinists and aerospace workers union rejected a proposed extension of its contract with the aircraft maker. By a 2-to-1 margin, Boeing workers rejected the eight-year extension offer, with union representatives pointing specifically to preserving defined-benefit pensions as a key element of the "no" vote. Even with the dispute ongoing, Boeing still sees great promise both for its coming 777X production line and for other aircraft models that have seen strong demand.
The real answer to why the Dow isn't crashing lies in Cisco's relative lack of significance in calculating the average. With a share price of just $21, Cisco carries only about a 1% weighting in the price-weighted Dow, meaning even double-digit percentage drops have only a minimal impact. The nearly $3-per-share plunge in Cisco's stock only equates to about 20 points of downward pressure on the Dow, showing how little of the index's everyday movements depend on Cisco and other low-priced stocks. By contrast, Boeing's $134 share price gives it more than six times the influence on the Dow, giving even a relatively small percentage move a lot more weight.
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The article Dow Morning Report: Why Isn't Cisco's Drop Making the Dow Crash? originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Cisco Systems and Home Depot. 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.