By Rolf Agather, managing director, US research
The primary objective of the Russell US Indexes is accurate representation of the US equity market, which is itself a reflection of the US economy. As such, the economic sector weights for the Russell 3000 confirm a stark reality; a massive shift in the nature of the US economy over the last half century.
The US has traditionally been a manufacturing economy, supplying a variety of raw materials, industrial products, and consumer goods domestically and abroad. However, over the last 40 years, there has been a marked shift from the manufacturing of physical products to more information- and service-oriented businesses like technology, health care and financial services. The historical sector weights in the Russell 3000 provide tangible evidence of this dynamic. Using the Russell Global Classification System (RGS) we can chart the historical year-end Russell 3000 weights to nine broad sectors of the US market over the last 40 years.
There has been a substantial shift in the US economy away from industrial sectors such as Energy, Materials and Processing, and Producer Durables to more service-oriented sectors like Technology, Health Care, and Financial Services. Grouping these sectors together shows how dramatic the shift is in aggregate.
The three industrial sectors had a combined weight of 47% at the end of 1978, which decreased to 19% by the end of 2018. Conversely, the three service-oriented sectors went from 16% of the Russell 3000 to almost 56% over the same time period.
Another interesting indicator of the economic shift is the change in the relative dominance of the very largest companies in the Russell 3000. Comparing the 10 largest companies in the Russell 3000 from 1978-2018 reveals that companies who once dominated the US economic landscape have much reduced influence today.
Source: FTSE Russell. Data based on Russell 3000 Index universe, from December 1978 and December 2018. Past performance is no guarantee of future results. Please see end for important legal disclosures.
Only Exxon remains one of the top 10 stocks in the Russell 3000 after 40 years. IBM, the largest company at the end of 1978 was once 5% of the Russell 3000 Index and one of the most recognized companies in the world. It is now the 44th largest company in the index. General Electric, General Motors, and Standard Oil of California (now Chevron) are still in the Russell 3000 Index but no longer among the top 10 largest companies. Standard Oil of Indiana fell victim to global consolidation when it merged with British Petroleum (a non-US company) in 1998, and Royal Dutch Petroleum and Schlumberger were reclassified as non-US companies in 1981 and 1984, respectively, which removed them from the index.
As a result, the change in sector makeup of the Top 10 companies is apparent. Half of the top 10 at the end of 1978 were energy companies, whereas at the end of 2018 the majority of the top 10 holdings were classified as either Technology, Health Care, or Financial Services. Also of note, five of the top 10 companies in 2018 were all created within the last 50 years1, perhaps an indication that it is easier to scale businesses based on information and services rather than the creation of physical goods.
The US equity market is a powerful reflection of the dramatic changes in the US economy over the last 40 years. Traditional manufacturing processes have migrated overseas in response to cheaper labor, raw materials, and potentially less regulation, but the US economy has adapted with an increasing focus on information- and service-oriented products. The economic sector weights of the Russell 3000 provide an accurate and consistent view into this dynamic, and will continue to do so as the US economy continues to evolve. For a closer look at how we leveraged four decades of information to show how the US equity markets have reflected the overall growth in the US economy as well as the shift from a largely industrial economy to one that is more technology and service, read our latest research paper, “Russell US Indexes — 40 years of insights.”
 Microsoft-1974, Apple-1976, Amazon-1994, Alphabet (Google)-1998, Facebook-2004
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