COVID-19 Correlations: Local Cases, Local Returns?

That local sentiment affects local stock returns is a no-brainer in financial markets. Numerous behavioral studies support this. When a sports team loses, for example, the stocks of local companies tend to fall as well. Similar patterns have emerged around the weather and election results. That is, sunny weather in a given market correlates with outperformance in the corresponding stocks, and stocks associated with particular causes or candidates do well when the election appears to favor them.

But what has the COVID-19 era revealed about this local phenomenon? Specifically, since 2020, has the number of COVID-19 cases had any correlation with stock returns in certain regions?

Subscribe button

To study this premise, we have identified four sectors associated with specific geographies. We focused on the communications, energy, technology and finance industries and the corresponding regions of the US with which they are often associated: Los Angeles, Houston, the San Francisco Bay Area and the city of New York, respectively. We used exchange-traded funds (ETFs) as proxies for each industry and region, with the Communications Services Select Sector SPDR Fund (XLC) standing in for Los Angeles/communications, the Energy Select Sector SPDR Fund (XLE ) for Houston/energy. , the Technology Select Sector SPDR Fund (XLK) for the Bay Area/Technology and the Financial Select Sector SPDR Fund (XLF) for New York City/Financials.

Within each sector/region, we looked at how the case count for that particular metro area correlated with the associated industry’s returns from February 2020 to February 2022.

So what did we find?

Average weekly abnormal returns

Sector/Region Low number of cases of COVID-19
25th percentile and below
High number of cases of COVID-19
75th percentile and above
Communications (Los Angeles, XLC) 0.0017 0.0001
Energy (Houston, XLE) -0.0108 0.0217
Technology (San Francisco Bay Area, XLK) 0.0046 -0.0015
Finance (New York, XLF) -0.0006 -0.0026

Across all four areas, we identified no significant difference in one-month abnormal returns of high or low COVID-19 cases over the full two years of data.

But the worst month for the count of COVID-19 cases was a different story. In months when COVID-19 cases were at their peak, there was a negative correlation between cases and returns. In other words, as case counts increased in these regions, the prices of ETFs associated with the local industry fell.

Month of higher cases: Correlation between stock returns and cases

Communications (Los Angeles, XLC) -0.049
Energy (Houston, XLE) -0.572
Technology (San Francisco Bay Area, XLK) -0.050
Finance (New York, XLF) -0.231

Our results suggest that only the worst months of COVID-19 had an effect on returns in localized areas and industries. In particular, as cases increased in Houston, XLE prices plummeted.

Of course, correlation is not causation, and the financial performance of these industries and regions is hardly explained by a single variable.

However, the results suggest that COVID-19 may have had a disproportionate effect on localized returns, but only when local case counts were high enough.

If you liked this post, don’t forget to subscribe to Entrepreneurial investor.

All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

Image credit: ©Getty Images/Avalon_Studio

Professional training for CFA Institute members

CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Entrepreneurial investor. Members can easily register credits using their online PL tracker.

Derek Horstmeyer

Derek Horstmeyer is a professor at the George Mason University School of Business, specializing in exchange-traded funds (ETFs) and mutual fund performance. He is currently director of the new Financial Planning and Wealth Management major at George Mason and founded the first student-managed mutual fund at GMU.

Luis Paz-Perez

Luis Paz-Perez is a senior at George Mason University pursuing his Bachelor of Science in Business with a concentration in Finance. He is interested in financial markets, private equity and consulting. He currently serves as the Investment Committee Chair of the Montano Student Managed Investment Fund at GMU. After graduation, he will work toward his CFA charter.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *