I read that the Fed’s stimulus last March has contributed to a spectacular rally in stock markets. And indeed S&P500 has increased a lot since March.

But how does the mechanism work? How does the fact that central banks are buying more US treasuries help the stock market to rally?

  • $\begingroup$ Duplicate of economics.stackexchange.com/q/37982? $\endgroup$ – Nai Aug 3 '20 at 5:50
  • $\begingroup$ I cannot see any explanation of the mechanism by which the FED intervention affects stock markets. Can you please provide more clarity? $\endgroup$ – Diuoo Aug 3 '20 at 9:16
  • $\begingroup$ @d'Halluin this is not duplicate. Your question was about how exactly the last round of stimulus affected stock market. Actually even worse it was about which opinion of two economists about the last round of the stimulus was more correct. That cannot be answered without opinions as it requires empirical study of what was the effect of last stimulus on stock prices which is unlikely to be forthcoming for at least 1-3 years. However, Q of Di EffeDue is about general mechanism. As I read it this user is not asking about the effect of March stimulus but $\endgroup$ – 1muflon1 Aug 3 '20 at 10:52
  • $\begingroup$ about what kind of relationship there is between stimulating economy and stock market in general - that is completely different question on which actually some actual research exists. $\endgroup$ – 1muflon1 Aug 3 '20 at 10:52
  • $\begingroup$ Author didn't cite his source for "I heard that". But Jeffrey Sachs claimed this. See economics.meta.stackexchange.com/q/2026. Author — do you want to add that quote to your post? $\endgroup$ – Nai Aug 22 '20 at 22:13

If there were economic laws that could be used to determine the level of the stock market, why would people post them here, and not use these rules to make money themselves? (This leads ti the Efficient Markets Hypothesis).

Stock prices are what investors are willing to pay. If investors believe that practically anything causes the price to go up, they will bid up prices. It does not matter whether these beliefs make sense.

In this case, the premise is that Fed stimulus will cause the economy to grow faster, and thus profits are likely to be higher.


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