(i) I don't understand point 1 beneath. Why does the Federal Reserve's buying assets lower risk premiums?
(ii) I don't understand point 3 beneath. Why does lower stock rate of returns increase stock prices? Won't lower stock rate of returns lower stock demand? Won't some investors buy something else other than stocks?
I think I know why the stock market is up... and it's not because the Coronavirus is going away.
It requires some macroeconomic and finance knowledge, but maybe, just maybe:
- Fed actions (buying assets) are lowering risk premiums
- Fed actions (lowering rates) are lowering asset yields overall
- Both of these actions lower stock yields, which increases stock prices
- Lower stock yields = longer duration for stocks (dividend discount model)
- Longer duration + lower stock yields = less overall sensitivity to the lower expected earnings for next 12-24 months due to Coronavirus
- Plus... a maybe.... maybe long-term inflation expectations due to printing money = higher earnings (in pure dollar terms) for cash flows 5-30 years from now
Run those things through a discounted cash-flow model, and you get higher stock prices. Near-term earnings become less important to the overall picture.