Felix Salmon says
Part of the problem is that QE has become, in part, a game of “kill all the shorts”—a game which a glance atIOC or OPEN or even UTA will tell you is being played very well indeed. Correlations are high, which is always a bad sign, and that weakens the raison d’être of the entire market, which is to allocate capital efficiently. Instead, the stock market becomes a place where people park their money in the hope that it will go up and in the expectation that if it goes down, the Fed will step in and rescue them.
So in a perfectly rational world stock prices represent the discounted future profits of a corporation. But discounted by what? Presumably, by the interest rate on bonds which are equally risky.
Thus, if the Fed drives down interest rate that should on a completely rational basis drive up stock prices.
Now, in a more real world setting you could think of the Fed as pushing private investors out of Treasuries. The Fed is driving down the yield and so you want to go somewhere else. One of the places you might want to go is stocks.
However, this is precisely how the policy is supposed to work. It increases Tobin’s Q which in turn encourages investments. In the real world this means that companies should be less inclined to buy back their own stock as the price rises, this encourages them to use cash on hand to either increase dividends or increase capacity.
It also means that venture capitalists are selling into a richer market. This encourages them to take chances on more firms. Lastly, it means that struggling companies can get a better deal issuing additional equity.
All of these make real investment, that is the buying of equipment, software and fixed structures more attractive