That local sentiment influences local stock returns is a long-standing truism in financial markets. Numerous behavioral studies prove this. For example, if a sports team loses, Shares of local firms also are likely to fall. Similar patterns have emerged all over the place Weather and election results. That is, sunny weather in a given market correlates with outperformance of the corresponding stocks, and stocks related to particular causes or candidates perform well when elections look like getting into their favor.
But what has the COVID-19 era revealed about this local phenomenon? Specifically: Have the variety of COVID-19 cases since 2020 had a connection to stock returns in certain regions?
To examine this premise, we identified 4 sectors related to specific regions. We focused on the communications, energy, technology and finance industries and the corresponding US regions with which they’re commonly associated: Los Angeles, Houston, the San Francisco Bay Area and New York City, respectively. We used Exchange Traded Funds (ETFs) as rough proxies for every industry and region, with the Communication Services Select Sector SPDR Fund (XLC) representing Los Angeles/Communications and the Energy Select Sector SPDR Fund (XLE) representing Houston/Energy. the Technology Select Sector SPDR Fund (XLK) for the Bay Area/Tech and the Financial Select Sector SPDR Fund (XLF) for New York City/Finance.
In each sector/region, we examined how case numbers in each metropolitan region correlated with returns within the associated industry from February 2020 to February 2022.
So what have we found?
Mean weekly abnormal returns
| Sector/Region | Low variety of COVID-19 cases twenty fifth percentile and below |
High variety of COVID-19 cases seventy fifth 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 4 areas, we didn’t find a serious difference in abnormal returns in either a high or low COVID-19 case month across your entire two years of information.
But the month with the worst COVID-19 case numbers was a special story. During the months when COVID-19 cases were highest, there was a negative correlation between cases and returns. In other words, as case numbers rose in these regions, the costs of ETFs linked to the local industry fell.
Month with the best variety of 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 City, XLF) | -0.231 |
Our results suggest that only the worst COVID-19 months had an impact on returns in specific regions and industries. In particular, because the variety of cases increased in Houston, XLE prices plummeted.
Of course, correlation is just not causation, and the financial performance of those industries and regions can hardly be explained by a single variable.
Still, the outcomes suggest that COVID-19 can have had an outsized impact on local returnees—but provided that local case numbers were sufficiently high.
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Photo credit: ©Getty Images/Avalon_Studio
