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Why good news for the economy can be a drag on your 401(k) – Yahoo Canada Finance

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NEW YORK — A huge shift is underway within the stock market, one that might roil your 401(k) in the short term, but one that many professional investors also see leading to longer-lasting gains.

A surge of optimism that the pandemic is on the way out has convinced investors to revamp their playbooks for where to put money. Most stocks across the market are rising, with the biggest gains coming from companies that would benefit most from a healthier economy, such as airlines and banks, after they got pounded lower for much of the pandemic.

But all the hope at the same time is forcing a climb in bond yields, which in turn is sending a group of tech stocks back to earth after they carried the market for much of the pandemic. When bonds pay more in interest, investors are less willing to pay as high prices for stocks seen as the most expensive or to wait as long for their big growth forecasts to come to fruition.

Because of the way stock indexes are calculated, any weakness for the biggest stocks can mask strength that’s sweeping across the rest of the market. It’s why the S&P 500 is up less than 6% so far this year: Energy stocks have soared more than 38% and financial stocks have stormed about 17% higher, but tech stocks, which account for more than one-quarter of the index’s market value, rose less than 2%.

All that churning underneath the surface may sound inside baseball, but it has a big impact when 401(k) accounts are tied more than ever to the performance of the S&P 500 and other indexes. More than half the dollars in U.S. stock funds are directly mimicking indexes, according to Morningstar.

In other words, your 401(k) could fall even if the economy — and the majority of stocks in the market — are rising. It’s the mirror-image of what happened early in the pandemic, when the S&P 500 powered higher even though the economy was falling into a terrifying pit. And professional investors say this rotation among sectors still has room to run.

“It brings me back to business school, where we learned about how all the indices are different,” said Lamar Villere, a portfolio manager at Villere & Co. in New Orleans. “It seems so boring and academic, but there is not one monolithic thing called the stock market. It’s these hugely different areas of the market that are moving differently.”

Investors have already felt the moves in recent weeks, when expectations for coming inflation and economic growth suddenly hit an upswing as COVID-19 vaccines rolled out and Congress neared its $1.9 trillion economic rescue.

The Nasdaq composite tumbled more than 10% from February 12 through March 5, with its many tech stock holdings hurt by the sudden rise in yields. The S&P 500 also fell over that span, down 2.4%, but more than half the stocks within the index were rising during that time.

Marathon Oil and other energy producers led the way, with several up more than 20%. Cruise-ship operators were also steaming much higher. If the economy does roar back soon, as nearly everyone on Wall Street is anticipating, profits should jump much more for those types of companies than for big tech stocks, which had actually benefited from the stay-at-home economy.

That’s why if the S&P 500 falls because of drops for a just a few heavyweight companies, Wall Street should take it in stride. Many analysts and professional investors expect the improving economy to boost profits for companies enough to more than make up for any stumbles caused by rising rates in the near term, and they expect the S&P 500 to climb higher over the next year.

Since their recent tumble, tech stocks have come back as worries about inflation have been tamped down a bit. The revival for tech stocks helped the S&P 500 return to a record on Monday. And even if the shine never fully returns to tech stocks, many are continuing to produce huge profits that support their stocks, such as Apple and its nearly $29 billion in net income last quarter.

But many professional investors nevertheless expect the rotation out of tech stocks and into other beaten-down areas of the market to continue for a while longer. Tech and high-growth stocks continue to look much more expensive than the rest of the market, and higher interest rates make that gap look more glaring. That could keep the pressure on the S&P 500 and index funds that track it.

High-growth stocks had been largely pulling away from their more cheaply valued rivals, called value stocks, for much of the past 15 years, said David Joy, chief market strategist at Ameriprise. Over the long term, a reversal could last just as long.

Of course, within such long-term trends, the market can swing back and forth in momentum several times. For this most recent move into value stocks and out of high-growth tech stocks, Joy said he thinks there’s likely months left to go.

“If I had to guess, it’s halfway to maybe two-thirds done,” he said, “but it’s still the place to be.”

Stan Choe, The Associated Press

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Economy

Canada posts hefty job losses in April as third wave bites

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By Julie Gordon

OTTAWA (Reuters) –Canada lost more jobs than expected in April as fresh restrictions to contain a variant-driven third wave of COVID-19 weighed on employers, Statistics Canada data showed on Friday.

Some 207,100 jobs were lost in April, more than the average analyst prediction for a loss of 175,000. The unemployment rate climbed to 8.1%, missing analyst expectations of 7.8%. Employment is now 2.6% below pre-pandemic levels.

“This episode seemed to be a little more impactful in that it led to a big decline in full-time jobs and specifically in private-sector employment,” said Doug Porter, chief economist at BMO Capital Markets.

“There were some heavy hits in education and culture and recreation. So it seems like the third wave bit into other sectors a little bit more deeply than the second wave.”

Full-time employment was down by 129,400 while part-time employment fell by 77,800 positions.

With many retailers shuttered in April and the restrictions also hitting hotels, food services and entertainment, service sector employment plunged by 195,400 jobs. Employment in the goods sector fell by 11,800.

As COVID-19 infections surged in April, a number of Canadian provinces imposed fresh restrictions, including shuttering or limiting non-essential businesses and closing schools. Cases are beginning to decline, but reopening is still weeks away and economists expect further job losses in May.

Canada has so far fully vaccinated just over 3% of its nearly 38 million residents, while more than 36% have received a first dose. By the end of June, Canada expects to have received 40 million doses.

Long-term unemployment increased by 4.6% to 486,000 people, which suggests some labor market scarring is beginning to show, said Leah Nord, a senior director at the Canadian Chamber of Commerce.

“The job prospects for displaced workers grow slimmer with every month in lockdown as more businesses throw in the towel,” she said in a statement.

Total hours worked fell 2.7% in April, while the number of people working less than half their usual hours jumped 27.2% to 288,000.

“The hours worked numbers were I think weaker than had been expected,” said Andrew Kelvin, chief Canada strategists at TD Securities. “I think it suggests a weaker April than the Bank of Canada would have had penciled in.”

The Bank of Canada in April sharply boosted its outlook for the Canadian economy and signaled interest rates could start to rise in 2022.

The Canadian dollar was trading 0.3% lower at 1.2187 to the greenback, or 82.05 U.S. cents, after touching on Thursday its strongest level in 3-1/2 years at 1.2141.

(Reporting by Julie Gordon in Ottawa; additional reporting by Steve Scherer, Fergal Smith and Nichola Saminather, Editing by Hugh Lawson, Mark Heinrich and Nick Zieminski)

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Ivey PMI shows activity expanding at a slower pace in April

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TORONTO (Reuters) – Canadian economic activity expanded in April but the pace slowed from a 10-year high the previous month, Ivey Purchasing Managers Index (PMI) data showed on Friday.

The seasonally adjusted index fell to 60.6 from 72.9 in March. The March reading was the highest since March 2011 and the second highest since the PMI was launched in 2000.

Economic restrictions were tightened in some Canadian provinces in April to tackle a third wave of the coronavirus pandemic.

The Ivey PMI measures the month-to-month variation in economic activity as indicated by a panel of purchasing managers in the public and private sectors from across Canada. A reading above 50 indicates an increase in activity.

The gauge of employment fell to an adjusted 58.0 from 62.7 in March, while the supplier deliveries index was at 37.8, down from 39.6, indicating companies are having greater difficulty meeting increased demand.

The unadjusted PMI fell to 59.9 from 67.3.

 

(Reporting by Fergal Smith; Editing by Chizu Nomiyama)

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Economy

Canadian dollar rises for sixth straight week despite jobs decline

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Canadian dollar

By Fergal Smith

TORONTO (Reuters) – The Canadian dollar was little changed against the greenback on Friday as jobs data for both Canada and the United States fell short of estimates, with the loonie holding near its strongest level in 3-1/2 years and extending a weekly win streak.

Canada lost 207,100 jobs in April as fresh restrictions to contain a variant-driven third wave of COVID-19 weighed on employers, Statistics Canada data showed. Analysts had forecast a decline of 175,000.

In the United States, data for the same month showed employers hiring far fewer workers than expected, likely frustrated by labor shortages.

“You have this unhealthy environment where growth goals are struggling to be met but unfortunately inflation is picking up everywhere,” said Avi Hooper, a senior portfolio manager at Invesco.

Supportive of the loonie, one cause of inflation has been a surge in the prices of some of the commodities that Canada produces.

Copper surged to a record peak on Friday, fueled by speculators and industrial buyers as Western economies recover from the pandemic, while oil settled 0.3% higher at $64.90 a barrel.

“A higher oil price from current levels, we think, will be the catalyst for the next leg of Canadian dollar strength,” Hooper said.

The loonie was nearly unchanged at 1.2145 to the greenback, or 82.34 U.S. cents, having touched its strongest intraday level since September 2017 at 1.2125. For the week, it was up 1.2%, its sixth straight weekly advance.

The currency has been on a tear since the Bank of Canada last month signaled it could begin hiking interest rates in late 2022 and cut the pace of its bond purchases.

Canadian government bond yields fell across the curve. The 5-year touched its lowest since March 5 at 0.841% before bouncing to 0.878%, down 3.8 basis points on the day.

 

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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