How does monetary policy affect the stock market?

Monetary policy is a set of actions to control a nation's overall money supply and achieve economic growth, and it is seen as either expansionary or contractionary depending on the level of growth or stagnation within the economy.

• Contractionary

When the economy overheats, central banks raise interest rates and take other contractionary measures to slow things down, discourage investment, and depress asset prices, causing stock prices to decrease eventually. 

• Expansionary

During a recession, the central bank lowers rates and adds money and liquidity to the economy, stimulating investment and consumption, and having a generally positive impact on asset prices. So stock prices usually go up.