JP Morgan’s top quant says the ‘once in a decade’ rotation into value stocks will continue

The massive rotation into value stocks that rocked investors two months ago is going to extend into 2020, according to J.P. Morgan’s quant guru Marko Kolanovic.

The quant, whose reports have moved markets in the past, predicted rotation, going so far as to call it a “once in a decade” trade.

Value names staged a comeback in September after years of underperformance as investors bet on economically sensitive, cheap stocks on hopes for a U.S.-China trade deal. The strategist believes the rotation has more room to run on the back of the improving macro environment.

“Our view is that this rotation should continue in Q4 and Q1,” said Kolanovic, the bank’s global head of macro quantitative and derivatives strategy, in a note to clients on Friday. “Since September, we had further easing of monetary policy globally, progress on a trade deal, and most importantly turnaround in various macro indicators.”

The rotation into value and out of momentum has been quite impressive in the past month. The iShares Edge MSCI USA Value Factor ETF, one of the biggest exchange-traded funds focused on value factor, surged more than 11% in the past month, bring year-to-date gains to 20%. The value ETF has also caught up with the iShares Edge MSCI USA Momentum Factor ETF, which is up only about 19% this year.

Progress on U.S.-China trade coupled with better-than-expected U.S. economic data gave stocks a boost this quarter. The S&P 500 and Dow Jones Industrial Average both renewed their records this week.

For investors wondering if the recent rebound in interest rates could derail this cyclical rotation, Kolanovic said rising yields will bolster the move.

“Our view and analysis suggest that yields can increase another ~150 bps before they become a potential problem, and that rising yields will only accelerate the upside in cyclical and value stocks as they reflect improving economic conditions,” Kolanovic said.

The 10-year Treasury note jumped the most since President Donald Trump’s election on Thursday as trade optimism prompted investors to flee safety.

Kolanovic, who has a Ph.D. in theoretical physics, has predicted some big market moves in the last couple of years, gaining him a following on Wall Street. While he incorrectly called for a year-end rally in 2018 as markets plunged last December, he has been right in calling for the market to rebound from that decline.