Key Points:
- There is a longstanding belief in the financial markets that local events and trends can impact local stock returns.
- Research has shown correlations between local events like sports team performance, weather, and election results with stock market performance.
- A recent study investigated the correlation between COVID-19 case counts and stock returns in specific regions.
- Four sectors (communications, energy, technology, and finance) and their corresponding US regions (Los Angeles, Houston, the San Francisco Bay Area, and New York City) were analyzed.
- No major difference in abnormal returns was found between high and low COVID-19 case months across the two-year study period.
- In the months with the highest COVID-19 case counts, a negative correlation was observed between cases and stock returns.
- Results suggest that COVID-19 may have had an outsized effect on localized stock returns, but only when case counts were significantly high.
That local sentiment affects local stock returns is a widely accepted notion in financial markets. Behavioral studies have consistently supported this idea, showing correlations between local events and stock performance. For example, when a local sports team loses, the stocks of local firms tend to decline as well. Similar patterns have been observed with weather conditions and election results.
But how has the COVID-19 era shed light on this local phenomenon? Specifically, since 2020, have COVID-19 case counts had any correlation with stock returns in certain regions?
To explore this question, a study focused on four sectors that are closely associated with specific geographies. The sectors examined were communications, energy, technology, and finance, and the corresponding regions were Los Angeles, Houston, the San Francisco Bay Area, and New York City, respectively. To proxy these industries and regions, exchange-traded funds (ETFs) were used, with the Communication Services Select Sector SPDR Fund (XLC) representing Los Angeles/communications, the Energy Select Sector SPDR Fund (XLE) representing Houston/energy, the Technology Select Sector SPDR Fund (XLK) representing the Bay Area/tech, and the Financial Select Sector SPDR Fund (XLF) representing New York City/finance.
In each sector/region, the study analyzed the correlation between the COVID-19 case count in the respective metropolitan area and the returns of the associated industry from February 2020 to February 2022.
So, what were the findings?
Median Weekly Abnormal Returns
| Sector/Region | Low COVID-19 Case Count 25th Percentile and Below | High COVID-19 Case Count 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 City, XLF) | –0.0006 | –0.0026 |
Across the four sectors, no significant difference in abnormal returns was identified between high and low COVID-19 case months over the two-year study period.
However, when examining the months with the highest COVID-19 case counts, a negative correlation between cases and stock returns was observed. In other words, as case counts spiked in these regions, the prices of the ETFs associated with the local industries declined.
Highest Case Month: 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 City, XLF) | –0.231 |
The results suggest that only during the months with the highest COVID-19 case counts did localized areas and industries experience an impact on stock returns. Notably, as cases spiked in Houston, the prices of XLE plummeted.
It is important to note that correlation does not imply causation, and the financial performance of these industries and regions is influenced by numerous factors. Nevertheless, the findings indicate that COVID-19 may have had a significant effect on localized stock returns, but only when case counts were notably high.
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All posts reflect the author’s opinions and should not be considered as investment advice. The views expressed do not necessarily represent those of CFA Institute or the author’s employer.
Image credit: ©Getty Images/Avalon_Studio
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