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

The massive rotation into value merchandises 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 divulges have moved markets in the past, predicted rotation, going so far as to call it a “once in a decade” trade.

Value elects staged a comeback in September after years of underperformance as investors bet on economically sensitive, cheap stocks on hopes for a U.S.-China barter 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 go on 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 support easing of monetary policy globally, progress on a trade deal, and most importantly turnaround in various macro fors.”

The rotation into value and out of momentum has been quite impressive in the past month. The iShares Edge MSCI USA Value Consideration ETF, one of the biggest exchange-traded funds focused on value factor, surged more than 11% in the past month, topple b reduce 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 solitary about 19% this year.

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

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

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

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

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