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?
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.
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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.
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Derek Horstmeyer
Luis Paz-Perez
