Stock-Oil Comovement: Fundamentals or Financialization?

The return correlation between U.S. stocks and oil has shifted from negative to positive since 2008. We use a return decomposition framework to show that an underlying reason for this structural change is a shift in the correlation between cash flow news for both assets. The U.S. oil production is a key driver of both the stock-oil correlation and the cash flow news correlation. Post-2008, positive oil demand shocks are good news for the cash flows of both assets. Our findings help to understand the set of potential determinants of equity-commodity correlations and the diversification benefits of investing in commodities.