Snapchat (SNAP), the efficient markets hypothesis and the DJIA


Efficient markets is the academic finance dogma that all relevant publicly-available information that affects a given stock is instantaneously factored into its price. A corollary is that traditional security analysis is futile, since all the company and industry expertise you develop, and all the insights you may gain from modeling possible future earnings growth paths, are already baked into the current stock price. What I find most amusing about this bizarre belief is that it was formulated in the US during the early 1970s, a time when stocks were imploding as the Nifty Fifty stock mania came to an end.

Anyway, SNAP was down by 40%+, on the March quarter earnings report by management after Monday’s close. What bothered the market is summed up in this sentence:

“In the latter portion of Q1, advertisers in a wider variety of industry groups reported concerns related to the macro operating environment, including continued supply chain disruptions, rising input costs, economic concerns due to rising interest rates, and concerns related to geopolitical risks stemming from the war in Ukraine.” 

Typically, in lists like this companies are careful to begin with the most important influences and continue in descending order of importance. If we think like academics, then, the “new” information that caused SNAP, already cut in half ytd before the earnings release, to be pummeled yesterday is:

–supply chains are being disrupted (why increase desire for products if the shelves are bare?)

–inflation is a problem

–interest rates are rising, and


Not exactly news.

the DJIA

Regular readers will know that I’m not a fan. The Dow indices were great when they came out in the late nineteenth century. But they’re very narrow. At least as important, the way the names are weighted is goofy. Their main significance in today’s world is to signal that the user is clueless.


I read in Barron’s this morning that since September 2008 there have only been 25 trading days (out of about 3200, or about 0.8% of the time) on which the DJIA outperformed NASDAQ by more than 2 percentage points. Yesterday was one of them.

This may actually be significant. Since acquiring the Dow indices in 2012, S&P has cleaned up the DJIA. So it’s no longer the junkyard it once was. But it still contains a small number of the largest and most stable companies listed in the US. So it’s not really representative of the market as a whole. If we think that the DJIA stands for safety, which in my mind it does, and NASDAQ stands for risk, yesterday was one of the most extreme anti-risk, flight-to-safety expressions by the stock market since the Great Recession. It would be interesting to see when the other 24 days were.

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