Sixteen Predictions for 2016

We believe a key investment principle is to avoid situations where you have less than a 50% chance of being correct. It makes sense to hedge these outcomes and focus where you have a clear, repeatable edge. For considerations outside of any investment process, however, here are our sixteen predictions for 2016. Some may be useful, others entertaining, and a few might even end up being accurate.

1. Rising interest rates will be more gradual than expected and the US yield curve will flatten
   After December’s hike, a disconnect remains between Fed projections and market pricing. Growth has been managed to a modest upward trajectory, but the Fed is perplexed by inflation conditions. Computerization of the workforce, energy efficiency and online price transparency are among many deflationary forces in the economy today. These new factors are incompatible with old forecasting models built by Fed Governors long ago in academia. With disinflationary pressure unaccounted for, the pace of rising rates will be slower than expected and the difference between short and long-term rates will decline.
   
   
2. Democrat Hillary Clinton will defeat Republican Marco Rubio and Independent Donald Trump in the US Presidential Election
   Donald Trump has been consistent about two things while campaigning: his desire to be president and his refusal to run as an independent. If republican elites prioritize establishment over polls in choosing Marco Rubio, Trump will have nothing to lose – something we have seen before – making his desire to be president the priority. Political considerations aside, a split republican base amidst party upheaval will send the Clintons back to the White House.
   
   
3. Unicorns firms will struggle to justify valuations when coming to market as IPOs
   IPOs generated more than four times the return of the S&P 500 over the first half of 2015.[1] They have underperformed meaningfully since and this trend is set to continue. A lack of good ideas elsewhere has never been justification for an investment. The fundamental reason to hold stocks – your share of earnings – will painstakingly return to relevance.
   
   
4. The freelance economy will grow and more people will work from home
   Utility functions are among the first topics discussed in economics, so the income vs. leisure tradeoff isn’t new. Technology enabling project-based work from anywhere is. Employment platforms like HourlyNerd are empowering individuals to choose when, where and how they work, which in turn allows companies to maximize employee efficiency. This win-win will grow.
   
   
5. Daily fantasy sports companies will face new regulatory headwinds
   The notion that DraftKings employees won around $6 million using internal data on FanDuel is more than troubling. Debate over the technicalities of insider trading here is superfluous – the data was obviously non-public and, given the profits, obviously material. A culture that bends rules in the gaming industry never lasts long.
   
   
6. New discoveries will be made in space as NASA’s Juno arrives on Jupiter
   2015 was a banner year for space exploration and 2016 could be even better. After finding oxygen on a comet and eating food grown in space, we will soon get our first look beneath the clouds of the solar system’s largest planet.
   
7. Banks will ironically adopt bitcoin’s blockchain technology for managing their ledgers
   Security has always been paramount when it comes to transactions. Using a linked, linear sequence for all of them makes too much sense for banks to ignore.
   
   
8. TV series will outshine movies in entertainment with content moving online
   The dawn of full-season streaming online television has arrived. This new genre, driven by Netflix and Amazon, caters to preferences that networks neglected for decades. With multi-dimensional storylines offered on demand over the course of a full series, luring people to a crowded theater for feature films will be an increasingly tough sell.
   
   
9. Like Volkswagen, other companies will be found to have faked emissions tests
   Sadly, it is unlikely that there was only one bad apple.
   
   
10. The Patriots will beat the Panthers by a field goal in Super Bowl 50
    Ranked #2 and #3 by FiveThirtyEight’s ELO model, this prediction is less about the splash. Instead it is made to highlight the impending fulcrum of change in the NFL. A Patriots win symbolizes victory for more than the team and Tom Brady. It shows who controls the game – the players, not the owners or Commissioner Roger Goodell.
    
    
11. Crowdfunding will take off as the preferred channel for angel investing
    New rules from the SEC opened equity crowdfunding to the general public. Startups can now raise up to $1 million from unaccredited investors, and this change will meaningfully impact how early-stage companies are funded.
    
    
12. Banks will remain under pressure and widespread layoffs will continue
    Greater price transparency, lower trading volumes, and continued regulatory issues will push downsizing further at banks.
    
    
13. High yield credit defaults will rise, sending shockwaves through financial markets
    If energy prices fail to recover, defaults in the sector are inevitable as many producers will head into 2016 unhedged. We have seen rising default rates before, but recovery rates make the scenario more challenging as falling prices have rendered many oilfields cash flow negative. In the case of bankruptcies this leads to lower recovery rates for creditors operating along a supply chain already under pressure. This increases the risk of knock-on effects in financial markets.
    
    
14. Biometric authentication will be increasingly important for email and online services
    More than 1.2 billion unique logins and passwords were stolen over the past 18 months. People will use new technology to change the locks. Apple’s Touch ID is a key first step, but with fingerprints everywhere, retinal scans and other biometric authentication devices will be next.
    
    
15. Brick and mortar retail locations will transition, catering to pop-ups for online brands
    As traditional retailers have struggled, the pop-up industry has grown to approximately $10 billion in sales.[2] Nordstrom, Best Buy and others have established store-within-store partnerships, and results thus far have been encouraging. Current occupants will be forced to rethink business models and this flexible solution will gain traction.
    
16. Medical breakthroughs will be made in the fight against cancer
    Academic studies now predict one in two people will get cancer during their lifetime. Well over $500 billion has been spent on research since President Nixon declared a War on Cancer in 1971. The size of the problem and resources behind it deserve progress toward a cure.

[1] Based on total returns for the Renaissance IPO Index and S&P 500 Index from 12/31/2014 through 6/30/2015
[2] Estimates based on research by PopUp Republic

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