The correlation between stock and bond prices has flipped from positive to negative in recent years, signaling that supply-side shocks rather than demand-side factors now dominate the risks facing the economy, according to a new analysis published this month by the Federal Reserve Bank of San Francisco. The stock-bond correlation, computed from monthly S&P 500 prices and 10-year Treasury yields over a five-year trailing window, turned negative in the early 2020s after staying mostly positive since the early 2000s. The shift indicates that investors now expect economic risks to stem from supply disruptions—such as energy price shocks, immigration shifts, and tariff policies—rather than the demand-driven concerns that prevailed for two decades.

The stock-bond correlation climbed from roughly –0.5 in the 1990s to positive territory in the early 2000s, where it remained until the early 2020s when it reversed to negative again, the report shows. The correlation between stock prices and oil futures prices followed a similar pattern, also switching to negative in recent years except for a sharper dip during the mid-2000s oil-price boom. Oil market uncertainty, measured by the Chicago Board Options Exchange Crude Oil Volatility Index, spiked twice in the 2020s—first during the pandemic's onset and again during recent Middle East conflicts. The correlation between the Oil VIX and oil futures prices was negative until 2025, hitting levels as low as –0.8 around 2020, but then increased sharply and turned positive starting in 2025.

The authors interpret these findings as evidence of a structural shift in how markets perceive economic risks. A positive stock-bond correlation emerges when higher demand drives up economic activity and stock valuations while inflation pushes bond yields higher, the report explains. A negative correlation occurs when supply shocks make goods scarcer, lowering activity and stock prices but raising inflation and bond yields. The recent switch to negative territory means that "investors may not expect a quick return to a demand shock-driven economy," and the forward-looking nature of asset prices suggests "a supply-driven economy may be the new normal for some time," the analysis states.

The shift reflects fundamental changes in the economic landscape. In the 2000s and 2010s, primary risks to growth stemmed from the demand side, including concerns that the zero lower bound on interest rates and secular stagnation would lead to low investment and weak expansion. By contrast, the 2020s brought a resurgence of supply-side factors: the pandemic disrupted businesses and created supply chain bottlenecks, geopolitical conflicts triggered energy price shocks, and developments in artificial intelligence, immigration patterns, and tariff policies all posed supply-driven risks. The positive correlation between oil uncertainty and oil prices now indicates that negative supply shocks and their associated uncertainty are driving up oil prices, whereas uncertainty from negative demand shocks typically pushes prices lower. The report concludes that policymakers may face more frequent supply shocks as well as "an uncomfortable combination of elevated inflation with softer economic activity in the near term."