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

NEW YORK (AP) — 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...