A top strategist warns the 'intellectual health of society' is in danger - and explains why investors should be very worried
- Facts and evidence have started taking a backseat to opinion, and that mentality is bleeding into investing, according to Bernstein.
- The firm scoured more than 5 million books spanning 500 years in an attempt to provide quantifiable evidence of this trend.
- Bernstein argues this is a harmful mindset that distorts investor perception, and could pose problems as the market enters a late-cycle environment.
If you've spent any time at all on Twitter, you've surely realized that facts and evidence often take a backseat to opinion and conjecture.
Bernstein has noticed too, and it's gone through extensive legwork to quantify what it describes as the "fall of facts." The firm's findings are jarring to say the least, with society appearing to have regressed all the way back to a 19th-century mindset.
The chart below shows this dynamic in play. It shows how the usage of the word "fact" has changed over time, using a tool designed to search for it in Google's library of more than 5 million books published in the period from 1500 to 2008. The darker line at the end reflects a similar analysis applied to the comments section of Reddit.
The same situation has unfolded when it comes to the word "evidence," with Bernstein's findings using the same methodology displayed below. As you'll note, it's seen an even sharper decline, highlighting once again what the firm sees as a disconnect in reason.
"This is the first significant decline in the frequency of their use since the onset of The Enlightenment in the 18th century," Inigo Fraser-Jenkins, a senior analyst at Bernstein and the firm's head of global quantitative and European equity strategy, said in a client note.
And while Bernstein is worried about what this all means for the world at large, the firm argues investors are at particular risk. In their mind, the increased propensity for traders to rely on opinion is negatively affecting the investment landscape, which will be particularly problematic as we enter the final stage of a market cycle.
"Our ultimate concern is for the intellectual health of society, but there are issues here that are more immediately germane to investors," said Fraser-Jenkins. "This could well matter for economic growth. The increase in the use of the words 'fact' and 'evidence' from the early eighteenth century coincided with the first significant and sustained increase in economic output per capita in human history."
The disconnect between opinion and reality has manifested itself within the framework of corporate earnings. Bernstein notes the gap between S&P 500 operating and reported earnings is currently "very wide." This is significant because operating profit usually reflects the opinions of management, while reported numbers represent fact-based findings.
And while the spread has previously widened in the late stages of economic expansion, Bernstein notes this is the first time in history the gap has grown due to an acceleration in operating earnings, as opposed to a fall in reported profit. (See chart to right.)
In other words, conjecture has infiltrated thinking around earnings season to a degree never seen before.
"We see this as a tangible example of the triumph of opinions over facts," said Fraser-Jenkins. "It should be of very tangible concern to the investment community. If we are already late in an economic cycle when the tendency for company managements to employ a rosy spin on their numbers is at its most acute, then we should worry if this gap between opinion and reality is wider than in previous cycles."
This is not to say Fraser-Jenkins is completely opposed to bucking conventional thought. He readily acknowledges how important such behavior has been throughout history, and says research-driven arguments have helped shape the world we live in today.
But with people increasingly keen to cut corners, Fraser-Jenkins isn't holding his breath when it comes to some sort of huge imminent breakthrough.
"Challenging authority and received wisdom is a good thing, but only if one is doing so with appropriate evidence and facts," said Fraser-Jenkins. "The Scientific Revolution succeeded because it did precisely that."