There is a common saying that time heals almost everything. Yet, even as we embark on the fifth year since the pandemic began, most of us are still longing for many pre-pandemic norms that we used to take for granted. At this stage, it is becoming increasingly likely that some things may never return to the way they were in 2019. This time, “time” seems to be rubbing in bad news instead of healing it. For most young people, health concerns, inflation, and higher interest rates weren’t even part of their lexicon before the pandemic began. Chances are they are top of mind today.
By the numbers, though, these concerns should be subsiding since COVID is no longer a great public health concern, inflation is significantly down from its high, and, in our view, interest rates likely peaked last year. Furthermore, widely held assets like stocks recently reached new all-time highs and home prices remain remarkably resilient. To top it all off, two potentially transformative innovations—artificial intelligence and appetite suppressing GLP-1 drugs (Wegovy/Ozempic)—could drive significant positive change across many sectors of the economy over the coming years. By many accounts, 2024 should be much more compelling than 2019.
Not surprisingly, sentiment may simply take time to catch up to this more auspicious point of view. Several recent studies have shown that even though inflation has moderated, most Americans still feel like it hasn’t improved much. In reality, prices haven’t really fallen too broadly; they are simply not moving up as much as they had been, which typically doesn’t feel all that great. Granted, between 2019 and 2023 the price of food—as measured by the Consumer Price Index (CPI)—increased by a whopping 25%. But thankfully, according to the Economic Policy Institute, this was matched by an equally impressive general increase in wage growth with earners in the low-end wage category experiencing cumulative wage growth of roughly 35% during this same period. That’s pretty encouraging. According to the Federal Reserve, household net worth grew 37% for the average American family as home values increased and the stock market rose. These figures help explain why consumption has remained strong, even if that doesn’t necessarily make paying more for just about everything feel any better.
More recently, even though inflation is now quite close to the Federal Reserve’s rather restrictive 2% target, it seems to have stalled in the final stretch. Part of this is due to the strength of the overall economy, and some is due to the lagged nature by which some price categories are measured. Again, wage growth is playing a big part in the persistence of services inflation, but recent data has suggested that it is moderating as an influx of immigrants has created less competition to fill lower paying jobs. In our view, general inflation should continue to come down, albeit at an increasingly slow pace as the cost of housing is more realistically weighed and as wage growth slows. Moreover, we all may long for the prices of 2019 (or perhaps better yet, 1969!), but the economic cost of getting back there would be devastating and would require a period of significant deflation. Besides, even in a world that had more normalized inflation of 2% in recent years, prices would still be about 10% higher today than they were back in 2019.
In turn, our disappointment—dare we say malaise—about recent inflation (especially given constant headline news stories about it) may be preventing us from fully appreciating that innovation is moving full speed ahead these days with several very exciting special developments. Both artificial intelligence (AI) and GLP-1 drugs are showing significant promise to improve efficiency across many industries, potentially reducing healthcare costs and dramatically improving the quality of life for many people. It is rare to be at the early stage of two coincidentally and potentially transformative evolutions, and, ironically, we all seem a bit skeptical about it.
Of course, some facets of AI certainly seem scary and may ultimately have negative outcomes. But when we think back to the early stages of the internet, many parts of it were also scary and some might make the case that the changes it brought about have not really been too positive. However, there is no denying that it increased the pace and ease of communication, made many parts of our lives much easier, and was ultimately quite disinflationary. While the eventual impact of AI won’t be fully understood for quite some time, there is much speculation that its contribution to annual global GDP could be twice that of the internet and happen in half the time.
When GLP-1 drugs first made headlines about their ability to help patients suppress their appetite and meaningfully lose weight more easily, many were skeptical. Historically, weight loss drugs have been an ineffective long-term solution, and many have turned out to be dangerous. However, GLP-1 drugs have been used since 2012 to treat type 2 diabetes and, thus far, appear to have favorable safety profiles. According to the Center for Disease Control (CDC), the United States spends about $150 billion annually on obesity-related health care; and obesity can also frequently lead to heart disease which, according to the CDC, costs our health care system over $200 billion per year. Goldman Sachs estimates that these related cost savings could add almost a half percent to America’s annual GDP if 30 million users take the drug and 70% experience benefits. If 60 million users take these drugs, the economic benefit could be as high as a 1% addition to GDP.
As is typically the case with most new promising innovations, sentiment tends to assume the best-case scenario until proven otherwise. In examining the valuation of the companies that are currently experiencing the biggest positive impact from AI and GLP-1, valuation is admittedly high but, in most cases, does not appear to be too far out of line given their promising growth prospects. Furthermore, many of the world’s largest companies are investing heavily in both areas and hence a slowdown in this activity is not likely anytime soon.
As time goes on, we expect that the pandemic environment—and even the recent difficult and lingering inflation—will eventually be “healed” and become a distant memory. Interestingly, if artificial intelligence and GLP-1 drugs are everything that we hope they will be, we could be living in a not-to-distant world where our fond pre-pandemic life actually seems like nothing more than a steppingstone to greater things.
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