I was recently told that stock markets in the US and EU has boomed as a result of quantitative easing, where the central banks has bought bonds with longer maturity to push the prices higher and consequently lowering those yields. Due to the lower yields on long maturities investors turn to other investments (primarily stocks) to achieve better returns, thus pushing prices higher as demand increases.
From a macro-economical perspective this I find this understandable, but from a more fundamental perspective I can't seem to find any logic in this. Say the prices should reflect the true value of the firms, is there any reason to why the "value of the firm" (considering the whole market as one) should increase faster as a result of the actions of the central banks? (Assuming this as actually the case. By quickly approximating the geometric means since after the financial crisis yields a return of roughly 18% per year, of course the lowest point from where I'm calculating the market might have been somewhat undervalued.. but still, it seems a bit higher than "usual".)
Of course there is the obvious explanation that banks can borrow money more cheaply and perhaps companies can more easily invest in new projects from debt financing etc. But should that really make that big of a difference?
I'm not sure if this is the appropriate forum to ask this question. I hope so!
Of course there is the obvious explanation that banks can borrow money more cheaply and perhaps companies can more easily invest in new projects from debt financing etc. But should that really make that big of a difference?
Yes, that is the basic premise of macroeconomics equationY = C + I + G + NX
. – DumbCoder May 7 '14 at 16:37