JPMorgan quant guru says the long-awaited rotation into value stocks is here to stay

Reuters / Lucas Jackson

  • The long-awaited comeback of value stocks beaten down due to the pandemic may finally be here, JPMorgan says, thanks to a promising COVID vaccine and likely US political gridlock.
  • The bank’s quant guru Marko Kolanovic wrote in a Monday note that value stocks now have “greater staying power.” 
  • However, this doesn’t mean that investors should turn completely away from the growth and momentum stocks that have crushed the market in 2020, JPMorgan added. 
  • In a rising market, momentum likely lags, but given superior fundamentals it should not see an outright crash (i.e. in absolute terms). In other words, we see value converging to the upside as opposed to Momentum converging to the downside,” said JPMorgan.
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Throughout the pandemic, analysts have clamored to call when value stocks will make a comeback.

Now, a team of JPMorgan analysts led by top quant guru Marko Kolanovic says news of an effective vaccine means that long-underperforming value stocks will finally have their moment. 

“The backdrop of globally synchronized expansion, legislative gridlock and positive vaccine news should mark a breakout point for value stocks, which have been beaten down due to COVID crisis,” they said. “By contrast, momentum/growth stocks should lag.”

News of a Pfizer vaccine that could be at least 90% effective in treating the coronavirus sent value stocks soaring on Monday. The iShares Russell 1000 Value ETF jumped over 6% on Monday shortly after the announcement. However, the value ETF is still down 5.6% year-to-date, while its growth counterpart, the iShares Russell 1000 Growth ETF, is up 28% year-to-date.

Read more: A Wall Street bank breaks down why Pfizer and BioNTech’s vaccine efficacy news means a faster return to normal — and shares the 16 stocks set to bounce back rapidly as soon as COVID panic recedes

Based on forward-looking price-to-earnings ratios, JPMorgan found that value stocks have never been this cheap when compared to momentum stocks, and therefore says investors shouldn’t be underexposed to value stocks.

However, this value stock success doesn’t necessarily mean that growth stocks will crash. JPMorgan told investors to consider a “barbell,” strategy and balance their portfolios so they’re not overexposed to growth stocks and also not underexposed to value stocks.

“Recent developments should help revitalize the value trade and give it greater staying power,” JPMorgan said. “In a rising market, momentum likely lags, but given superior fundamentals it should not see an outright crash (i.e. in absolute terms). In other words, we see value converging to the upside as opposed to momentum converging to the downside.”

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