Monday's mammoth shift to value stocks previews the market rotations coming next year, JPMorgan says

• Monday's positive vaccine news drove the biggest one-day rotation to value stocks since 2008, and investors should prepare for similar moves in the near future, JPMorgan strategists said Thursday.
• Though momentum in the value rotation has since cooled, growth stocks remain unsustainably crowded and expensive compared to the broader market, the team wrote in a note to clients.
• The Monday rotation is "a perfect warning indicator of what may come in 2021," they added.
• The bank recommended investors use a "barbell" strategy with their portfolios and balance stakes in value stocks with defensive growth and momentum plays.
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Pfizer's positive vaccine update on Monday sparked the biggest one-day rotation into value stocks since the financial crisis.

Expect similar trading frenzies throughout the next year, JPMorgan strategists said Thursday.

Reinvigorated hope for a near-term vaccine breakthrough prompted swaths of investors to dump tech giants and other growth stocks for small-caps and cyclicals in Monday and Tuesday trading. Inertia in the value shift has since cooled, and momentum stocks are still expensive relative to the rest of the market, strategists led by Dubravko Lakos-Bujas wrote in a note to clients. That leaves plenty of room for value to run, they added.

"A positive growth backdrop, closing output gap, and COVID normalization all suggest that [the] value trade has legs," the team said. "Monday and Tuesday of this week is a perfect warning indicator for what may come in 2021."

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Given Monday and Tuesday's value rallies, the subsequent reversal in favor of growth stocks was "to be expected," according to the bank. Momentum stocks can even extend their outperformance if virus headlines continue to turn increasingly negative, or if vaccines face an unexpected delay.

But for every boost to growth names, investors can anticipate more volatile moves into cyclical sectors. Value stocks are poised to outperform once the virus is contained and the global economy fully emerges from restrictions and fear, the team said. Conversely, momentum and growth picks will significantly underperform the market once risk appetites improve and investors exit the crowded stocks.

Read more: Buy these 21 overlooked stocks set for huge gains as the world's vaccine hopes just became a reality, Jefferies says

Investors should utilize a "barbell" strategy until "extreme positioning" in growth stocks normalizes, the team wrote. Portfolios should balance positioning in defensive momentum plays and the value stocks likely to benefit most from a successful COVID-19 vaccine and economic recovery.

Market participants should still discern between good and bad value, the team added. High-quality companies are more likely to offer some protection through reopening as some economic scarring lingers.

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