Why Stock Market Volatility May Rise on Friday Due to Russell’s Rebalancing

Investors are bracing for a heavy day of trading on Friday as US stock indexes rebalance Russell, an annual reconfiguration that comes amid increased volatility in the stock market.

Global index provider FTSE Russell began the rebalancing process on May 6, the so-called ranking day, to ensure that the indices accurately reflect the US stock market. The reshaping, scheduled for after the market closes on Friday, tends to be among the biggest trading days of the year, Stephen De Sanctis, equity strategist at Jefferies, told MarketWatch last month.

We see: ‘Don’t want to be shocked’: It’s ‘ranking day’ and this is what it means for US stocks

About $12 trillion in investor assets were measured for US Russell indexes, according to a FTSE Russell statement in early June. The larger trading volume associated with the rebalancing could exacerbate stock market volatility, which has been high as investors grapple with rising inflation, higher interest rates and concerns about a slowing US economy.

Volume is likely to pick up heading into the closing bell on Friday, according to Jay Woods, chief market strategist at DriveWealth, a broker-dealer on the floor of the New York Stock Exchange.

It’s all about shutdowns,” Woods said by phone Wednesday. “The closing of the deal is the most important trade of all these mutual funds and ETFs,” he said before rebalancing because it serves as a measure of their performance.

CBOE VIX Volatility Index
It was trading around 29 Wednesday afternoon, well above the 200-day moving average of 23.5, according to FactSet data, at the latest scan.

The US stock market opened lower on Wednesday, but the Dow Jones Industrial Average DJIAAnd the
Standard & Poor’s 500 SPX
Nasdaq Composite
It showed gains in afternoon trading, according to FactSet data.

Meanwhile, the Russell 2000 RUT . indicatorAnd the
Which consists of small-cap stocks in the United States, rose slightly Wednesday afternoon, FactSet data shows, upon recent examination. The index has fallen more than 24% this year through Tuesday.

Read: Why stock market investors are ‘worried’ about a looming earnings slump

See also: Stock market isn’t fully priced in with looming recession, warns Morgan Stanley’s Mike Wilson

Under Russell’s redistribution, a “large portion” of the META for Meta Platforms Inc. was created. Affiliate of Facebook
Shares are set to move into the Russell 1000 Value Index from the Russell 1000 Growth Index, according to Jefferies’ note on June 5. Meta shares are down about 53% in the 12 months through Tuesday, according to FactSet data.

Growth stocks dip in 2022. Russell 1000 Growth Index RLG
It’s down nearly 29% this year through Tuesday, with losses exceeding RLV for the Russell 1000 Value . Index
14% decrease, according to FactSet.

Read: Meta platforms are poised to become “valuable” stock in this month’s Russell redistribution, says Jeffries

As part of the rebalancing, several energy companies were scheduled to move to the large-cap Russell 1000 Index from the small-cap Russell 2000 Index, according to preliminary results highlighted in a June 3 FTSE Russell statement. Among them is Antero Resources Corp. EnglishAnd the
Chesapeake Energy Corp. CHKAnd the
Ovintiv OVV . CompanyAnd the
PDC Energy Inc. PDCEAnd the
Range Resources Corp. RRC
and Southwestern Energy SWN.

In his June 5 report, Jefferies noted “significant sector shifts” in the Russell 2000 value index, as energy is expected to see its weight decline as it becomes a larger part of the Russell 2000 growth index. The shift comes as shares of companies have surged Energy has increased significantly this year, although the sector has sold out this month.

For example, the power segment of the S&P 500 XX: SP500
It jumped more than 33% in 2022, but is down about 14% so far in June, according to FactSet data based on trading Wednesday afternoon.

“With recent energy sell-offs, cyclical companies are the lagged behind in June,” DeSanctis said, in a research note from Jefferies dated June 20. The weight drops dramatically in their indices due to the FTSE Russell rebalancing.”