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Financial Markets, Oil Prices, and Supply-Side Risks

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  • Thomas M. Mertens
  • Wesley Wasserburger

Abstract

The relation between stocks and bonds indicates whether supply or demand shocks dominate the risks to economic activity. After two decades of concerns primarily about changes in demand, the stock-bond correlation recently flipped, suggesting that the perceived source of risk to the economy has shifted towards supply shocks. Other financial correlations, such as the stock-oil correlation, also changed accordingly and thus agree with this interpretation. In line with this evidence, financial market pricing now indicates that elevated oil prices and potential inflation are prominent sources of risk.

Suggested Citation

  • Thomas M. Mertens & Wesley Wasserburger, 2026. "Financial Markets, Oil Prices, and Supply-Side Risks," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2026(21), pages 1-6, August.
    • Handle: RePEc:fip:fedfel:103632
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