Fears of runaway inflation have been swapped for worries about a rapid slowdown in global economic growth — and that made for one very long, holiday-shortened week for U.S. investors — but is this new narrative the right one ?

A Treasury debt rally became a buying frenzy, sending long-term yields sharply lower. That took any remaining wind out of the sails of the so-called reflation trade, which had favored shares of more cyclically sensitive companies expected to benefit the most from rising prices and accelerating economic growth.

What changed? There are three important elements to the shift in the market narrative, said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, which has $605 billion in assets under management.

The first is a perceived change in the way the Federal Reserve reacts to data, with investors no longer looking for policy makers to be as tolerant of economic overheating and rising inflation as previously thought, she said. The second is that while economic growth is expected to remain strong, the pace of growth is expected to have peaked. Third, there are worries the spread of the delta and other variants of the coronavirus that causes COVID-19 could force a renewed round of restrictions that will weigh on global economic activity.

“Together, that’s a very different consensus market narrative than we had a few weeks ago, when the focus was all about stimulus and overheating,” Goodwin said, in a phone interview, noting that investors must now ask: “Is this new narrative the right one?”

The real pain in the past week was in the Treasury market, where a rally drove long-term yields sharply lower and prices higher. Much of that rally was attributed to forced short covering by Treasury bears, who had feared inflation, creating something of a feeding frenzy, driving the 10-year yield

to a five-month low below 1.25% on Thursday before finally relenting.

But analysts said the move, at least in part, also reflected legitimate concerns over the global economic growth outlook.

That Thursday dive in yields, and accompanying growth fears, triggered a broad stock-market selloff that saw the S&P 500

and Nasdaq Composite

retreat from all-time highs, while the Dow Jones Industrial Average

shed more than 500 points at its session low. Stocks trimmed losses by the close and then pushed higher Friday, with all three major indexes finishing at records.

One casualty was the stock market reflation trade. The small-cap Russell 2000 index RUT fell 1.1% for a second straight week of losses, while the tech-heavy Nasdaq-100

saw a 0.4% weekly rise. Value stocks underperformed, with the Russell 1000 Value Index

falling 0.3%, while the Russell 1000 Growth Index

rose 1%.

“The ‘reflation’ and ‘rotation’ trades — associated with optimism about rapid, broad-based economic recovery from the pandemic and higher inflation — has arguably been flagging since as long ago as the end of the first quarter, but clearly took another hit this week,” said Oliver Jones, senior markets economist at research firm Capital Economics, in a Friday note.

Sectors, like energy and financials, and factors, such as value, that benefited most from the reflation/rotation narrative have underperformed, he noted.

Jones argued that it makes sense for optimism about the U.S. economic recovery to top out as supply constraints bite into activity. And global growth expectations may also see pressure, with China’s economy likely to continue to disappoint.

Related: China’s monetary policy easing underlines worries about slowing growth

At the same time, the U.S. economy remains on track for a very strong recovery in absolute terms, far exceeding the one that followed the global financial crisis of 2008. And core inflation in the U.S. may prove somewhat more persistent than anticipated, he argued.

That sets the stage for a scenario in which “the rotation/reflation trade label may become progressively less useful in the coming quarters,” he said.

In particular, parts of the trade, including rapid gains in most stock markets and outperformance by energy companies is likely over for now, he said, while the drop in Treasury yields is probably an “overreaction” given the path of growth and inflation in the U.S.

Investors will get a look at evidence on both the inflation and growth front in the coming week. The June consumer-price index is set for release Tuesday, while a producer-price reading is set for Wednesday. A raft of other economic data is due over the course of the week, including June retail sales figures on Friday.

And then there’s the start of the corporate earnings reporting season, which is expected to offer another peak as profits roared in the second quarter relative to the early days of the pandemic last year.

“With earnings season kicking off next week, the bar is set quite high and corporate America better produce another stellar quarter or there could be some disappointed bulls,” said Ryan Detrick, chief market strategist at LPL Financial, after Friday’s record close.

In One Chart: Get ready for peak earnings growth as second-quarter results kick off next week

Goodwin said the choice for investors boils down to either leaning into the old narrative that benefits cyclical stocks and shorter duration assets or the new one that expects economic growth to prove more sluggish and anemic, much as it was before the pandemic, favoring growth stocks and defensive sectors.

The best response, however, may be a little bit of both, Goodwin said.

Reflation likely still has some room to run in the near term. Distribution of child tax credit payments will begin later this month, while labor shortages may be alleviated in coming months as children return to school and additional unemployment benefits expire, she said, while consumers are sitting on sizable savings.

At the same time, growth and inflation are peaking, she said, and valuations are stretched across asset classes. While still maintaining a cyclical tilt, the changing backdrop calls for a more balanced approach to portfolios, she said.

Investors need to look closely at sectors and individual companies that can leverage changing trends and pass rising prices on to consumers, she said, in a more selective environment rather than one in which a rising tide raises all boats.

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