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Thursday, September 29, 2022

COVID-19 Correlations: Local Cases, Local Returns?

That local mood affects local stock returns is a longstanding truism of the financial markets. Numerous behavioral studies back this up. When a sports teams loses, for example, the stocks of local firms tend to fall as well. Similar patterns have emerged around weather and election results. That is, sunny weather in a particular market is correlated with outperformance of the corresponding stocks, and equities associated with particular causes or candidates do well when elections seem to result in their favor.

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

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To study this premise, we identified four sectors that are associated with specific geographies. We homed in on the communications, energy, technology, and finance industries and the corresponding US regions they are often associated with: Los Angeles, Houston, the San Francisco Bay Area, and New York City, respectively. We used exchange-traded funds (ETFs) as rough proxies for each industry and region, with the Communication 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/tech, and the Financial Select Sector SPDR Fund (XLF) for New York City/finance.

In each sector/region, we looked at how the case count in that particular metropolitan area correlated with returns in the associated industry from February 2020 through February 2022. 

So, what did we find?


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 areas, we did not identify any major difference in abnormal returns in either a high or low COVID-19 case month across the full two years of data.

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


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

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

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

Nevertheless, the results suggest that COVID-19 may have had an outsized effect on localized returns — but only when the local case counts were sufficiently high.

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

Image credit: ©Getty Images/Avalon_Studio


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Derek Horstmeyer

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

Luis Paz-Perez

Luis Paz-Perez is a senior at George Mason University pursuing his bachelor’s of science degree in business with a concentration in finance. He is interested in financial markets, private equity, and consulting. He currently serves as the president of the Investment Committee for the Montano Student Managed Investment Fund at GMU. After graduation, he will be working towards obtaining his CFA charter.

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