Financial Markets, Oil Prices, and Supply-Side Risks

The stock-bond correlation has recently shifted from positive to negative territory, signaling that investors now perceive supply-side shocks as the dominant economic risk rather than demand-side concerns that prevailed for two decades, according to research from the San Francisco Federal Reserve. The correlation flip aligns with corroborating evidence from energy markets, where the stock-oil correlation also changed sign around the same time, reflecting elevated oil prices and inflation concerns. The shift reflects a structural change in economic conditions, including pandemic-related supply disruptions, geopolitical energy shocks, artificial intelligence developments, immigration shifts, and expanded tariffs.