EXPERT ANGLE

HIGHSPEED HEALTHCARE

by Laura Sydell

We are on the cusp of an extraordinary transition in medicine made possible by high-speed Internet, artificial intelligence (AI), and wearables. Medical experts are calling this new frontier precision medicine because advancing technologies are going to make it possible to consider each patient’s unique lifestyle, environment, and gene variations in ways that will make health care as individualized as a tailor-made suit.

While the global COVID-19 pandemic hasn’t brought us much good news, it has edged us a little further down the road to our digital health future, and many experts think that’s good. Dr. Euan A. Ashley, director of the Stanford Center for Digital Health, says the pandemic bulldozed over one big obstacle to advances in telemedicine—insurance payments—and as soon as the pandemic hit, Medicare and Medicaid began providing full reimbursement for telehealth visits. Telehealth

Though a Zoom call might appear to keep the doctor at arm’s length from the patient, Ashley sees it differently. He says meeting with patients over Zoom during the pandemic reminds him of his childhood, when he would go with his physician father or midwife mother to make house calls. “You actually see [patients] in their home environments,” says Ashley.

He says this kind of information can really provide insight into someone’s lifestyle so he can give better recommendations on how to stay healthy. “The person who is most important is the patient, and we really have the technology to bring the medicine to them,” says Ashley.

Dr. Michael Blum, chief digital transformation officer at the University of California, San Francisco, and a practicing cardiologist, says technological advances are only one part of the equation. The technology needs social acceptance, and the pandemic has helped that along.

“The pandemic has changed the mind space about how health care is delivered,” says Blum. “Patients are now more comfortable with telehealth visits.”

Wearables

Telemedicine is just a small part of the way in which digital technology is transforming health care. Wearables are the start of being able to monitor health between visits to the doctor and detect health problems sooner. Google, Apple, and Amazon are investing heavily in the market.

Google is acquiring Fitbit, Apple has its Watch, and Amazon just released the Halo. Fitbit and the Apple Watch have Food and Drug Administration clearance for an electrocardiogram (ECG) monitor, and they can detect and notify a user of an irregular heartbeat.

Blum says he now has patients who tell him, “I have this device that is measuring my heart rate, or my Apple Watch is telling me I have atrial fibrillation.” Atrial fibrillation, or a-fib, is an irregular heartbeat that, if untreated, can be a warning sign that you are at risk for a heart attack, have an increased risk of stroke, or have another kind of heart disease.

Blum says these devices provide more than sufficient quality and amounts of data for use in making health and lifestyle decisions. However, he and other medical experts caution that any reading on these devices must be confirmed by professional-grade equipment.

There are also medical-grade wearables. For example, wearable glucose monitors and insulin pumps for diabetics can monitor 24 hours a day, seven days a week, and send data directly to your physician over the Internet. “That’s one of the chronic disease spaces that is really going to benefit [from wearables], or is already benefiting,” says Blum.

One thing both consumer-and professional-grade wearables are doing is collecting data—lots and lots of individualized data. Ashley, who is also a consultant for Apple, says that as wearables become more sensitive to changes in gait and motion, they will be used to detect early warning signs of neurodegenerative diseases such as Parkinson’s.

“It is very characteristic for a person with Parkinson’s disease to walk with a shuffling gait. People you live with don’t notice small changes. But now ... we’ll be wearing devices that know us electronically over many years and recognize how we walk,” says Ashley.

Artificial Intelligence and Deep Learning

The rapidly advancing field of artificial intelligence and deep learning will help medical professionals predict who might be more vulnerable to a disease.

AI is able to sort through massive amounts of data and find patterns in a way that the human mind cannot. Data collected in hospitals and from healthcare providers can be fed into an AI system to predict the best treatment for allowing a particular individual to recover faster from surgery.

AI will be used to analyze individual DNA and protein-to-protein interactions to detect which traits are manifesting in an individual patient—an important part of the equation, since not everything in a gene sequence shows up. Blum says this will allow physicians to tailor health recommendations to the individual.

Barriers and Risks

While there is great promise and optimism about how new technologies will transform health care, there are also some barriers and risks ahead. AI and deep learning find patterns in the data. But data can reflect class differences, racial divisions, and other biases.

In his private practice, Ashley sees higher-income patients with good jobs in Silicon Valley tech firms, as well as patients from the lowerincome communities of California’s Central Valley. It’s the richer patients who have a Fitbit or an Apple Watch, so it’s their data that’s getting collected. “That’s teaching the AI to begin with,” says Ashley.

There are also complex privacy and security issues that need to be sorted out as we move into the digital health age. Healthcare data is extremely valuable on the black market because it holds personal information that can be used for blackmail or identity theft. There have been numerous attacks on hospitals by hackers who have held data hostage for a price.

All the big tech companies are now looking to disrupt the healthcare industry. But their effort does raise questions about who owns the data these companies collect about you. In fact, the approval of Google’s acquisition of Fitbit has faced hurdles in Europe and elsewhere because of concerns over how the company might use the data it collects, especially when that data is combined with what Google already gathers from YouTube and its search engine.

Most physicians are moving or have moved over to electronic health records. However, you may have noticed that different doctors and health systems choose different electronic record systems, making it harder for each individual provider to get a complete picture of your medical history.

The different companies that digitize medical records have proprietary software. Blum says that for many of his patients, “I still don’t know ... what happened to them previously or what’s happening now, if they go to see multiple different doctors.” In this respect, countries like the UK that have a single nationalized healthcare system are able to make better use of digital records.

Despite the hurdles, Blum says, “I’m highly confident [health care] is going to look dramatically different from the prior decade.” As Microsoft co-founder and philanthropist Bill Gates once said about the computer revolution, “You ain’t seen nothing yet.”

INNOVATIONS IN MEDICINE

AI is driving innovation in clinical operations, drug development, surgery, and data management. Being a relatively new technology in health care, AI still has a long way to go, but the progress is impressive. Let’s explore some of the amazing applications and exciting breakthroughs in incorporating AI in medical services.

Robot Doctors

AI-enabled robots are increasingly assisting microsurgical procedures to help reduce variations between physicians. Today, top-of-the-line hospitals are equipped with complex and intelligent machines designed to operate with a precision rivaling that of the best-skilled surgeons.

Clinical Diagnosis Did you know that AI algorithms can diagnose diseases faster and more accurately than doctors? These algorithms are particularly successful in detecting diseases from image-based test results. According to Forbes, AI algorithms can scan and analyze biopsy images and scans 1,000 times faster than doctors, and the algorithms can diagnose with an 87 percent accuracy rate. Drug Discovery Pharmaceutical giants like Sanofi and Pfizer are teaming up with technology companies already invested in AI technology, like IBM and Google, to build a drug discovery program using deep learning and AI. Rather than using the traditional trial-and-error approach—a tedious venture that may take years and thousands of failed attempts—drug discovery is now data-driven thanks to AI research platforms. Researchers have even been able to redirect already existing drugs to combat new infections.

2021: TAKE TWO

by Kevin Barry and Sam Kirby

This time of year, many in our industry follow the time-honored tradition of penning an outlook for the next year. We can think of few times when this was a more difficult assignment.

A year ago, mere weeks before the COVID-19 pandemic sent the global economy into a tailspin, we laid out our list of wishes and worries that investors would face in 2020. On the wish list were a China trade truce and an accommodative Federal Reserve, while our worries centered upon meager growth conditions for corporate earnings and the global economy.

The worry list did not include the swift emergence and global spread of a novel, highly contagious virus.

Yet even though we could not have foreseen the unique challenges of 2020, the wishes and worries we outlined last year were, and still are, highly relevant to the investor mindset. After a rapid, V-shaped recovery in many parts of the economy, economic and earnings growth conditions are once again in focus as we think about where the recovery goes from here.

Our first 2020 wish-list entry—for a cooldown of the China trade dispute—failed to materialize this year. Trade tensions moved to the back burner but continued to simmer, aggravated by virus-related accusations. But our final wish-list item from our 2020 outlook turned out to be the most meaningful: an accommodative Federal Reserve. Aggressive policymaker response, both monetary and fiscal, is largely viewed as the linchpin of the rapid recovery in levels of economic activity and asset prices in the second half of 2020.

As we look ahead to 2021, we see a landscape that is both ripe for opportunity and marred by a continuing health crisis, lingering economic damage, and countless personal tragedies. The winter will likely bring more suffering, even as vaccine distribution begins in earnest and hopefully provides a return to something approaching normalcy sometime in 2021. Barring the disastrous effects of vaccine failures, virus mutations, or an acceleration of bankruptcies or job losses during what may be a very dark winter, the stage is set for a bifurcated year that provides two very different environments for investors. As in years past, our 2021 outlook does not predict the levels of the S&P 500 Index, the 10-year Treasury yield, or global gross domestic product (GDP). Instead, we will focus on the drivers of those measures, and we begin to think about the implications of some of the changes this crisis has brought about.

Consumer Spending

The strength and resiliency of consumer activity has been a significant driver of the economic rebound in the second half of 2020. Unfortunately, it has also been extremely uneven, with those least able to withstand economic instability suffering the most from job losses and reduced income. The Coronavirus Aid, Relief, and Economic Security (CARES) Act—the largest economic relief bill in U.S. history— provided an important lifeline in the form of direct income replacement, enhanced and extended unemployment benefits, student loan payment suspension, and eviction protections, among other provisions.

Despite the crisis, many households that escaped the direct economic impact of the pandemic have found themselves in strong financial shape and have seen conditions further improve through falling energy bills and shrinking borrowing costs from record-low interest rates— mortgage rates in particular. Meanwhile, the combination of home price and investment portfolio appreciation and high levels of savings have driven household net worth to all-time highs.

Figure One illustrates the reduction in the increase in household net worth as well as consumer debt service cost. This degree of household

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Sources: Federal Reserve, Cornerstone Macro. The financial obligations ratio includes rent payments on tenant-occupied property, auto lease payments, homeowners’ insurance, and property tax payments.

financial strength is far from the norm when exiting a recession and may portend a stronger rebound once the crisis passes.

While consumers continued to spend in 2020, their spending behaviors were radically altered by the pandemic. For many decades, there has been a trend in consumer preferences away from goods and toward services, and from in-home dining and entertainment to dining, sleeping, and recreating away from home. In 1998, authors Joseph Pine and James Gilmore described this transition as the experience economy, emphasizing the creation of memorable events with goods as props and services as the stage.

Such experiences typically require the very kinds of physical interactions made impossible by social distancing requirements, and consumers adapted by rapidly shifting their spending behaviors. In the immediate aftermath of the pandemic, consumer spending of all types declined significantly, with an 18 percent decline in total spending in April compared to January levels. However, as significant policy support came online, restoring confidence, preserving jobs, and directly supporting income, consumers quickly shifted spending from services to goods, including physical items to support their stay-, learn-, and work-from-home experience and their sanity.

Figure Two shows the pandemic’s uneven effect on consumer spending. At the end of October, spending on goods was more than 7 percent higher than January levels, largely offsetting the decline in service spending.

In 2021, widespread vaccinations stand to reverse this trend and may spark a strong revival of the experience economy as pandemic restrictions and fears ease, and weary consumers emerge from their homes. Although some of the pandemic-altered consumer behaviors are likely to persist to some degree—namely the significant expansion of e-commerce across a much wider array of product categories, growth in streaming entertainment, online education, and where we live and work—we expect a reversion of spending behaviors in 2021 that stands to benefit some of the hardest-hit categories within travel and leisure. Of course, these businesses must survive a very tough winter to reach that point, underscoring the importance of the latest stimulus deal reached in December.

Source: U.S. Bureau of Economic Analysis

Policy Support

There are several important preconditions for continued strength in consumer spending. The first, and by far most important, is a resolution of the pandemic itself through effective vaccines and therapies. Until then, appropriately sized and correctly aimed policy support remains critical. As significant policy support came online, consumers quickly shifted On a global basis, the combination of monetary and fiscal support in 2020 is estimated to approach nearly a third of GDP. This injection of cash and liquidity has spending from services to goods, eased financial conditions, buoyed struggling businesses and households, and including physical items to support stabilized confidence. We do not expect monetary policy support to disappear; the Fed has made clear its commitment to maintain exceptionally low interest rates and their stay-, learn-, and work-frombond-buying programs for as long as necessary. home experience and their sanity.

On the fiscal policy side, the streamlined $900 billion deal Congress reached in late December still represents the second-largest relief package in history. The package intended to shore up the economy until vaccines are widely distributed and provides targeted aid to consumers and small businesses, especially those within the hardest-hit sectors. The wide-ranging bipartisan package included:

This stimulus package represents a massive and much-needed injection of cash for households and businesses fighting for survival. The question is one of timing: Will the package provide enough support, for a long enough period of time, until widespread vaccinations allow a full reopening of the economy?

The outlook for follow-on relief packages will be influenced by the outcome of the Georgia Senate runoff elections in January, which set the stage for a 50-50 split within the Senate for only the third time in U.S. history. This outcome brings the possibility of larger and swifter stimulus that may buoy investor confidence until widespread vaccination is achieved, alongside the potential for higher taxes or other less market-friendly policy shifts. As the dust settles, winners and losers are likely to emerge from the new policy environment.

• $600 direct payments to most Americans; • $300 per week in enhanced unemployment benefits; • $284 billion for the small-business targeted Paycheck Protection

Program; • $82 billion for schools and universities; • $69 billion for vaccine development; • $25 billion for rental assistance; • A combined $44 billion for support of airlines, live performance venues, and public transit; and • $36 billion for additional programs such as food stamp benefits, childcare, and farmer aid. Inflation

The degree of government borrowing and spending at the scale described above naturally leads to a discussion of inflation. A global pandemic, by its very nature, is a deflationary event as it causes capacity underutilization at a massive scale. The signature characteristic of the recession that followed the 1918 Spanish flu epidemic was significant deflation, with price levels declining by an estimated 18 percent.

Prior to the pandemic, and on the heels of an expansionary and pro-growth policy environment, we had begun to see some hints of inflation in the form of rising commodity prices and a tightening labor market. As shown in Figure Three, inflation expectations tumbled to near 0 percent at the onset of the crisis in March, as measured by the five-year breakeven inflation rate, before gradually returning to more normal levels of near 2 percent. Thus far, the greatest inflationary effects can be seen in asset price appreciation, including stock and home prices.

The unprecedented amount of monetary and fiscal stimulus applied in 2020 creates natural concern about a period of higher inflation. Yet the same concerns were expressed during the financial crisis, which saw similar policies enacted (although smaller in magnitude), without the appearance of inflation. And Japan has not seen inflation materialize despite decades of large deficits relative to GDP and low (or negative) interest rates.

Our expectation for 2021 is for inflationary pressures to remain subdued. For excessive inflation to appear would require not only the recovery, but the rapid acceleration of economic activity, accompanied by wage growth. The global economic engine still has a long way to go before reaching full capacity, even after widespread vaccinations and a return to normalcy, and the U.S. economy still has nearly 10 million jobs to recover to reach pre-pandemic levels.

However, over the longer term it is important to consider the possibility of rising inflation. Monetary policy tools can be blunt instruments, sometimes with delayed effects—and with nearly every global central bank pulling out all the stops to stimulate and recover, the potential exists for policy overshoot. In addition, the Federal Reserve’s newly stated approach to average inflation targeting signals a tolerance for higher inflation for some period of time.

Investment Implications

The 2021 investment landscape represents a balancing act between short-term threats and longer-term promise. Of these, the emergence of effective vaccines represents the greatest promise, as it mitigates some of the extremely scary worst-case scenarios and a longer crisis timeline. Below are some of the key themes we are watching as we consider portfolio positioning for the new year.

We expect a continued, synchronized recovery in the U.S. and global economies, with corporate earnings reaching and exceeding prepandemic levels. Higher earnings could see stock price valuations— which are currently elevated by historical standards—return to more normal levels, serving to raise investor comfort.

We expect a broadening of equity performance, from the growthoriented and work-from-home winners of 2020—namely technology, health care, and consumer staples—to more cyclical stocks within industrials, materials, and consumer-discretionary sectors. As the economy strengthens and growth resumes, we expect improving conditions for value stocks. Financials stand to benefit from relaxed restrictions on stock buybacks, as well as a steeper yield curve that improves the ability of banks to earn profits from lending activities.

After a decade of U.S. dollar strength, the combination of mushrooming debt, the Fed’s commitment to keep short-term rates lower for longer, and a reversal of safe haven demand may point to a weakening trend in the dollar. This could be positive news for U.S. exports and international stocks. Within the fixed income landscape, we expect interest rates to remain low, with gradually rising yields for longer maturity bonds as growth conditions improve. This environment creates a lower return expectation for bonds. We continue to seek opportunities for higher yield from diversified sources, while minding quality, the amount of compensation offered by credit risk exposures, and the diversification and volatility dampening role of fixed income.

The COVID-19 pandemic has been a tragedy by any measure—from the personal loss of loved ones, employment, or business failures to the amplified stresses in workplaces, homes, and schools to the scale of the global economy.

For the optimistic, a comparison to the Roaring ’20s may be appropriate. A century ago, significant stresses from the conclusion of World War I and the Spanish flu pandemic caused a rapid acceleration of technological advancement that fueled gains in productivity and

prosperity. Economist Ed Yardeni of Yardeni Research draws this parallel in his blog (blog.yardeni.com), noting that the pandemic has accelerated medical science in the search for treatments and vaccines, while lockdowns and social distancing have significantly accelerated the long-underway digital transformation of our economy. He explains: “Technological progress always confounds the pessimists by solving scarce resource problems. It also fuels productivity and prosperity, as it did in the 1920s and could do again in the 2020s.”

Although there is still much work to be done and significant risks remain, the prospect of widespread vaccinations offering a resolution to the COVID-19 crisis sometime in 2021 offers a very bright beacon after an incredibly challenging year, and what could be a dark and dangerous winter.

Technological progress always confounds the pessimists by solving scarce resource problems. It also fuels productivity and prosperity, as it did in the 1920s and could ”do again in the 2020s. Ed Yardeni