Bubbles and crashes occur throughout history. There actually doesn’t appear to be any set frequency as to when crashes will happen. Since 1950 we note crashes (not necessarily U.S. stock market crashes) in 1962 (Kennedy Flash Crash), 1973–1974 (oil, Watergate), 1980 (gold), 1987 (Black Monday), 1990 (Iraq, Oil), 1991 (Japan), 1992 (Pound Sterling), 1997 (Asian Financial Crisis), 1998 (Russia), 2000 (dot-com), 2001-2002 (9/11, dot-com), 2008 (global financial crisis), 2010 (EU), 2013 (gold), and 2015 (China).

Over the past 100 years or so, dating back to 1900, there have been at least two prolonged periods of a strongly trending upward markets. The first occurred from 1944–1966 following the end of the Great Depression and war, while the second occurred from 1982–2000 and featured the high-tech/Internet/dot-com bubble that culminated in 2000. The most recent rise 2009–2018 is actually fairly short, so far, compared to the other two. It has been known as the “everything bubble.”

All other periods would have to be considered long periods of consolidation. That would have included the “Roaring Twenties” stock market rise, subsequent crash, and Great Depression. Indeed, the entire period from 1900–1944 was one long consolidation in some respects despite the extremes. The next consolidation period was 1966–1982 and the most recent was 2000–2009.

The question now is: is the current consolidation the start of another period of consolidation that ends in a crash, or is it merely a pause in a long-term bull market? During the 1944–1966 bull market there were significant pauses in 1946–1949, 1952–1953, 1956–1957, and 1961–1962. The steepest decline was the 1961–1962 mini-bear when the Dow Jones Industrials (DJI) fell 25%. Following that the DJI rose 86% from 1962-1966. By comparison the January/February 2018 drop was only 12.2%. But then the initial drop in July 2007 as the sub-prime mortgage market began to unravel was only 10.7%. Many thought the crisis that sparked the drop was over as the markets regrouped and made slightly higher highs in October 2007.

Usually when the economy comes out of a recession the first year or two sees strong growth. The chart below shows annual GDP growth rate. Note that recessions in 1953, 1957, 1960, 1970, 1974/1975, 1980/1983 all showed GDP annual growth rates of 5% or more following the recession. Following the early 1990s recession the annual GDP growth rate faltered and failed to really record any year over 5%. Following the 2001/2002 recession the annual GDP growth rate fell short of 5%. Coming out of the 2007/2009 recession the annual GDP growth not only failed to reach 5%, but it was consistently short of the growth rates out of both the 1990 and the 2001/2002 recessions.