What You Need to Know About This Year’s Russell Recon

By Catherine Yoshimoto, director, product management

• The Russell recon follows a well-planned timeline that spans several weeks and involves redefining breakpoints and reevaluating companies to reflect the US equity market.

• Pricing pressure doesn't apply on recon day as traders get ahead of additions and deletions, and the impact is typically already priced into the stocks.

• The annual Russell recon is a time to look back at the previous year's US equity market story, where defensive industries such as Consumer Staples and Health Care outperformed the broader index during volatile markets.

This year's annual Russell Reconstitution is fast approaching, with less than two months to go until 'recon day,' when our recalibration of the Russell US Index family takes effect. As one of the most widely anticipated market events, we often field many inquiries leading up to recon day.

To help address your questions, we've identified three important points to keep in mind ahead of the upcoming Russell recon:

1. The Russell recon follows a well-orchestrated timeline.

The Russell US Indexes are designed to reflect the ever-changing US equity market, and annual reconstitution is critical to maintaining accurate representation. Each year, the recon process involves redefining the breakpoints between large, mid, and small cap to ensure the previous year's market changes are captured. We also reevaluate companies to determine where they lie along the investment styles spectrum.

This year and every year, the Russell recon process follows a well-orchestrated timeline that spans several weeks-giving market participants a transparent view into the key events leading up to recon day.

2. Pricing pressure logic doesn't apply on recon day.

Recon day typically concludes as one of the highest trading volume days of the year, leaving many investors wondering about the impact on stock prices-and whether the recon puts upward pricing pressure on additions to the indexes and downward pressure on deletions. However, short-term impacts of the Russell recon on constituent stock prices haven't reliably followed this pattern.

The reason this pricing pressure logic doesn't apply on recon day is we've designed the process to give investors considerable lead time before the actual index reconstitution takes place. Per the timeline above, this year our "rank day"-when we rank the eligible companies to form the preliminary recon portfolio-takes place a full eight weeks before recon day. And beginning May 19th and into June, concluding on June 23^rd recon day, we're communicating updates on the preliminary changes to the newly reconstituted Russell Indexes.

As a result of this advanced notice, traders get ahead of additions and deletions, and by the time the actual reconstitution day arrives the impact is typically already priced into the stocks. In fact, at times trading in anticipation of the recon date goes too far-where adds are overbought and deletes are oversold. In these cases, actual recon day trades go in the opposite direction, with additions declining and deletions rallying.

3. It's an occasion to reflect on the year behind us.

Our annual Russell recon is not only a time to reshuffle our indexes to reflect the present-day US equity market, but it's also an occasion to look back on the previous year. Invariably, a compelling US equity market story emerges from examining Russell Index performance over the past year.

At the time of the 2022 recon, the previous year's story had been largely about the impact of inflation fears on US equities. As inflationary pressures have since only intensified, this theme has carried over into this year's story-with an additional chapter on volatility.

Over the past year, high inflation, rising interest rates, and a deteriorating global economic outlook have taken a considerable toll on US equities. For the year ending April 28, the Russell 3000 Index gained 1.5%, reflecting an abysmal 2022 where the index declined 5.8% from last year's rank day to year end, and a rebound in 2023 where the index has gained 8.3% year-to-date.

A closer look at Russell 3000 industry performance for the one-year period illustrates the impact of rising inflation and market volatility on US equities. For the second year in a row, Energy was the top performing industry in the index. As energy stock performance is naturally tied to energy prices-and energy prices are an important component of the U.S. Consumer Price Index-it stands to reason that the Energy industry would outperform during inflationary environments.

Industry performance also reflects investors' defensive positioning during the past year's volatile markets. While several cyclical industries have rebounded in the YTD rally, defensive industries such as Consumer Staples and Health Care outperformed the broader index for the one-year period.

Stay tuned for the next chapter

As we follow our recon process timeline in the weeks ahead, please visit our Russell recon page for the latest information and updates.

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