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America's incredible shrinking financial-services business

January 22, 2009 |  7:00 am

One measure of the collapse of shares of banks and other financial services companies is the sector’s shrinking importance in the benchmark Standard & Poor’s 500 index.

At the stock market’s all-time high on Oct. 9, 2007, financial stocks accounted for 20.1% of the market value of the S&P -- at that point, the largest share of any of the index’s 10 major industry sectors.

From the stock market’s perspective, finance then was the most important business in America.

Now (as of Wednesday), the financials make up just 10.5% of the S&P.

Sp500weightings On Tuesday, amid another blistering sell-off in bank shares, the sector's share of the index briefly fell to 9.6% -- the first time its weighting was in single digits since 1992, according to S&P.

The smaller an industry’s representation in the index, the less significant it is in moving the index day to day, up or down.

Other industry sectors have gained stature in the S&P as the weighting of the financials has withered. The healthcare sector, for example, now is 15.5% of the index, up from 11.6% in October 2007.

The energy sector’s weighting has risen to 14.1% from 11.6%.

The industry with the largest weighting in the S&P is technology, at 16.2%. That’s the same weighting it had in October 2007 -- which tells you that tech stocks’ decline since the market peak is about in line with what the index as a whole has lost, while financials have fared far worse.

Tech, of course, had its own comeuppance earlier in this decade: At the peak of the tech-stock bubble in March 2000, the sector accounted for a whopping 34.5% of the S&P index.

That was slashed to just 12.8% by the bottom of the 2000-02 bear market, in October 2002.

If the financial sector were to shrink by the same proportion from October 2007, its representation in the S&P would fall to 7.4%.

From the stock market’s point of view, that would make finance just the seventh-most-important major industry in America -- ahead only of basic-materials (commodities), telecom and utilities.

-- Tom Petruno

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