Cisco Deflates the Tech Rally

Weakness in the networking giant sent the Nasdaq sharply lower Thursday. The Dow and S&P 500 also fell as Bernanke warned of sluggish growth

Cisco Systems chairman and CEO John Chambers Ethan Miller/Getty Images

by Ben Steverman

Though a late-day rally minimized the damage, stocks fell again on Thursday as tech companies, Wall Street's success story in recent months, showed big losses after bad news from Cisco Systems (CSCO).

It was another volatile session on Wall Street with lots of headlines: Major financial institutions reported more big losses. Federal Reserve Chairman Ben Bernanke testified before Congress. Ford (F) offered some good news. And retailers and restaurants reported mixed sales figures from October.

By the end of trading on Thursday, the Dow Jones industrial average was down 33.73 points, or 0.25%, to 13,266.29. The broader S&P 500 edged down 0.85 points, or 0.06%, to 1,474.77.

But the tech-heavy Nasdaq composite index showed the most weakness, dropping 52.76 points, or 1.92%, to 2,696. For much of Thursday, the Nasdaq was off more than 3%.

Investors were obviously still jittery from Wednesday's session, when the Dow fell 361 points, and the S&P 500 fell almost 3%. High oil prices, a weak dollar and news of a major investigation of the mortgage industry hurt stocks.

Thursday's news headlines offered investors little relief. Cisco Systems' mediocre earnings disappointed, but its outlook for the next year really scared tech investors. That put in doubt the recent rally in technology stocks.

Tech was the "only saving grace recently" as investors punished other sectors on worries about housing, credit and economic growth, says Dan Genter, chief executive and chief investment officer at RNC Genter Capital Management. Cisco's earnings report and executives' comments put in doubt high expectations for tech earnings growth. "You need to have the earnings support," Genter says, but earnings predictions are falling across the stock market.

The credit crisis claimed more victims as AIG (AIG) and Morgan Stanley (MS) reported multi-billion-dollar write-offs -- though some investors seemed relieved that those losses are now out in the open.

Ford (F), however, reported stronger-than-expected business results. Also Thursday, retailers and fast-food restaurants reported mixed October sales figures.

Traders watched Bernanke for hints on interest rate moves or insight into the banking system's problems with risky credit. He told Congress the Fed would "act as needed" in reaction to financial turmoil. Policymakers see growth slowing in the fourth quarter, and then "remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane," Bernanke said in his prepared testimony.

Bernanke said inflation is "subject to important upside risks." "In particular, prices of crude oil and other commodities had increased sharply in recent weeks, and the foreign exchange value of the dollar had weakened," he said. "These factors were likely to increase overall inflation in the short run and, should inflation expectations become unmoored, had the potential to boost inflation in the longer run as well."

"Bernanke's testimony today certainly does not rule out the possibility of an easing next month," wrote Ken Kim of Stone & McCarthy Research Associates. The Fed chief spent far more time talking about risks to growth than the risk of inflation, Kim said.

But Action Economics interpreted Bernanke to imply the Fed will likely not cut rates at its December meeting, "even though the markets' first take is a more dovish reading." Treasury bond yields and the U.S. dollar fell on Bernanke's comments, reflecting higher expectations for a rate cut.

William Rutherford, president of Rutherford Investment Management, says investors may be losing confidence as the economy deals with a wide range of serious problems. "That's the one thing the Fed needs to worry about," he says. "