Question

On April 29 2020, the major stock indexes rose amid promising results for a COVID-19 vaccine and reassurance from the U.S. Federal Reserve Bank that it would use all its tools to help the economy. Why does the monetary policy have a strong influence on the share market?

Answer 1

During the reign of COVID19, the Federal Reserve tried to increase the monetary policy which makes huge impact in the share market. The increased money supply will raise the price of stock in the market. This will increase the amount of money in the market. This will improve the pandemic condition of the present economy. From the beginning of 2020 US equities showed an outperformance in the equity market. The coordinated fiscal and monetary policy of US economy makes a spill over during the pandemic situation. The earnings per share of the benchmark S&P 500 Index decline by 44% in the second quarter of 2020. Most of the communication and technology companies get benefit from the structural trends accelerated by the pandemic. This pandemic creates a downgrade for US equities.
The Federal Reserve’s monetary policies tried to promote the maximum level of employment, stable prices and also moderate the long term interest rates. The rise in the stock price attracts more investors to the market. This will helps to maintain the minimum growth of the economy during the pandemic period. This will increase the investment level and also maintain the then employment rate which should be essential for the current situation.