- Friday marks the annual rebalancing of the indexes maintained by Russell Investments, which follows on the heels of last Friday's quarterly S&P 500 rebalance.
- While rebalances are normal, in the run up to and after an index rebalance, affected stocks can trade abnormally for brief periods.
- Index rebalances are no cause for alarm—they are normal and expected events that have a fleeting impact on the market overall.
Summer arrived Monday, but the summer sun has yet to shine on stocks. Thursday was no exception as renewed eurozone debt worries grabbed headlines and plagued equity shares all day. While economic worries abound in the headlines, one action shouldn't worry global investors: index rebalances.
For some, summer's start evokes thoughts of sunblock, barbeques, and beaches, but around this time of year, our thoughts turn to index rebalancing. Friday marks the annual rebalancing of the Russell Investments indexes, which follows on the heels of last Friday's quarterly S&P 500 rebalance. For traders and index managers around the world, this can be one of the busiest times, and this year promises to be no different.
Capital markets aren't static—they change over time. For example, the S&P 500 is vastly different today than it was when it was founded in 1957. The periodic rebalancing of indexes is a normal part of market operations and ensures indexes properly represent the universe of stocks they're designed to measure.
When indexes are rebalanced, some stocks are added, others are removed, and the weights of the rest may change. As the changes are made, impacted stocks often trade abnormally for brief periods. The good news is the impact on stocks, like a sunburn, usually passes quickly.
Russell Investments' rebalance is substantial. There's roughly $3.9 trillion benchmarked against their indexes, which include the Russell 1000, 2000, 3000 and others. Traders and index managers alike are in for a long day as Bloomberg estimates Friday will be the biggest change to the Russell indexes since 2007. And Russell's changes come just a week after last Friday's S&P 500 rebalance (there's over $3.5 trillion indexed to the S&P 500), which likely includes many of the same stocks. But even though select shares might be experiencing a period of rebalancing nuttiness, markets overall will likely take the changes in stride.
Index rebalances aren't cause for alarm—they are normal and expected events that don't take capital markets by surprise. Further, rebalances help keep indexes representative of the market they attempt to mimic. It's possible the impending Russell rebalances could be contributing some to Thursday's market action—compounding renewed euro debt jitters. But the impact should pass quickly, like a summer thunderstorm.