Will we be full of the economic joys of spring when the season rolls around?

The uncertainties over the next three or four months are huge. But the financial markets have made up their minds that come the spring a rapid recovery will be in place, writes Hamish McRae

Elon Musk has become the third-richest American thanks to a recent surge in share prices (Getty Images)

Thanks to the surge in the price of Tesla shares, Elon Musk has become the third-richest American. Bully for him, but how do you reconcile booming share prices and a serious worsening of the Covid-19 pandemic across most of Europe and America?

The answer is that markets are looking through to next spring. The uncertainties over the next three or four months are huge. But the financial markets have made up their minds that come the spring a rapid recovery will be in place. Typically equity markets look six months ahead, or at least try to, for they are a very crude forward indicator. But with US shares now at record levels and UK and European shares recovering much of the ground lost earlier in the year, their message is clear: next year will be pretty good. Are they right?

The short answer is probably yes, but with three important qualifications, one of which is relevant to Elon Musk.

The yes is based on the near-certainty that the virus will be largely under control by the spring. The two vaccines seem to work and there will be more on the way. Once they are widely administered the normal thrust of the world economy will reassert itself. This has been a recession from an external shock, not one triggered by weaknesses in the economic system, like the 2008-09 downturn. Once that shock has been absorbed and the virus neutralised, growth will resume. And because we have all learnt how to run our lives more efficiently the scope for growth is all the greater.

So there will certainly be a big bounce next year. Whether that signals another decade of solid growth, such as most of the world experienced after the last crash, is of course unclear. But on a six-month view, things look fine.

Now for the qualifications, and we will start with the Elon Musk one. Tesla shares are booming and the company is about to join  the S&P 500 index. It will be the largest-ever new member, worth some $400bn. Tesla has revolutionised the world’s motor industry and hats off to Musk for that. But $400bn for a company that has only just got into profit?

The qualification is that this bull market in the US is built of aggressive expectations for the continued success of its high-tech sector. These companies, including Apple, Google, Facebook and so on, have indeed changed the world but there comes a point where every company, every sector, slips from a headlong gallop to a steady trot. Valuations adjust. That has happened to Vodafone, still the second-largest mobile phone operator in the world, and still worth £33bn. But it was worth five times that at the peak of the dot-com boom in early 2000.

So the question here is to what extent are US share values distorted by the same sort of euphoria that characterised the dot-com boom? The new technologies are astounding and have made life much easier in these difficult times. But at some stage people will decide that they would rather spend less time and money online, and more doing other things. Shares as a whole may go up but the high-tech sector may slip back.

That leads to the second qualification. When will markets rotate from growth to value? It is a hot subject at the moment. One of the reasons why US markets have run ahead of European and UK ones is that Europe and the UK does not have many high-tech companies, or at least not the dominant sort. What they do have is many solid enterprises making goods profits and fulfilling people’s needs.

There is a further twist to this story in that UK companies are particularly underrated at the moment, and I see Schroders is just launching a fund to try to take advantage of that. The bank thinks this is a “once-in-a-generation opportunity” to buy UK assets at a cheap price and it may well prove right. If it is, and this more general rotation from growth to value takes off, a lot of people will lose money on their high-tech US investments.

The third qualification is that all asset markets are artificially supported at the moment by ultra-easy money. At some stage – no one can know when – that flood of cash created by the central banks will be scaled back and interest rates will rise. None of us can hope to see the detail of what will happen. All that is worth saying is while the share markets are right to be looking to a real economic bounce next year, they are not yet focusing on the end of the easy money boom. Indeed, rather the reverse: they seem to think that interest rates will remain low, as in Europe even negative, forever.

Of course they won’t. But right now it is comforting that global investors are optimistic about next year, given the glum prospects for Thanksgiving and Christmas ahead.