Key points:
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- We all know we’re in a share market boom, but are we at the start, or the middle, or near the end?
- Here I put the current boom in context by looking at every boom-bust cycle on the Australian share market over the past 100 years.
- The pace of the current boom is actually quite moderate (although the US boom has been much stronger).
- There have been plenty of past booms that went a lot longer and a lot higher than the current boom.
- The longer and higher the boom, the deeper the bust, and the longer the recovery time.
- It’s not about pricing or valuations. Booms don’t end because or when markets become over-priced, or when reach a certain level of over-pricing. Over-priced booms can run on for many years. What ends booms is a trigger or series of triggers.
Today’s main chart shows the Australian share market since 1920 divided into ‘boom-bust’ cycles. Here I define a 'bust' as a decline of 20% or more for the market index. A 'boom' is the rally from the bottom of a fall of 20% or more to the start of the next fall of 20% or more, so the bottom of each bust is the starting point for the next boom-bust cycle.
These are not just isolated cycles I have picked out of history. If you connect all18 cycles together, they form a continuous string of nearly 28,000 trading days.
The scales for the y-axes (vertical) and x-axes (horizontal) are the same in each chart, so we can easily compare the different heights and durations of the booms and busts in each cycle.
For example, we can see that the biggest (highest) boom by far was cycle 10 (the mid-1980s boom), which ran up to nearly twice the height of the next highest, cycle 2 (the 1930s Depression rally). Most of the more recent booms have been very pale by comparison - including the current boom (cycle 18)!
Why worry about boom-bust cycles at all?
It is all very well to say that the overall share market has delivered returns averaging 11% per year over the past century or the past half century (which it has). ‘Time-in-the-market’ beats ‘Timing-the-market’ – right?
The problem is that ‘time-in-the-market’ only works over very long periods of time. You and I don’t have investment time frames of a century or half century, so we are not going to get those nice ultra-long-term returns (and those are past returns, not future returns).
You and I have shorter term ‘investment horizons’ - like few decades, which means our returns vary greatly depending on what stage of the boom-bust cycle we happen to be in.
Investor behaviour
Second, boom-bust cycles have a great bearing on investment decisions and outcomes. It takes a lot of practice and even more discipline to simply ‘ignore the market’ and resist the temptation to make decisions, which are very often to do the wrong things at the wrong times.
Ideally, we all should just simply do nothing - just ignore the markets completely and go about your daily lives. But a lot of people can't resist chasing the boom. They see their friends making 20% per year or more as the boom gathers pace, and they can't resist having a go themselves (‘FOMO’). But inevitably they also can't stand the pain of a big sell-off, especially when they got in late at a high price, which is when most people do. Many people sell out in despair, often at or near the bottom of the busts, and many are sold out by margin lenders.
As a result a large proportion of retail investors (and also many professionals and active fund managers) end up 'buying high' and 'selling low', at great cost to the future wealth and living standards of themselves and their families.
Even if you make no decisions, and simply ‘buy & hold’ for a couple of decades or so (either a lump sum or using ‘dollar cost averaging’ in over time), the returns you achieve over the whole period depend entirely on timing - when you happen to start investing – essentially the lottery of birth.
For my study on the huge variability of returns from ‘Time-in-the-market’, ‘buy & hold’ investing over various periods even up to several decades – see:
What causes booms & busts?
Putting aside the academic ‘efficient markets hypothesis’ (which claims that every asset in every market is at all times perfectly fairly priced, and instantly reflects every relevant piece of information, and therefore ‘booms’ and ‘busts’ don’t exist), there are three main real world answers to this question.
First - most cycles are driven or accompanied by economic cycles, or more specifically, cycles in investment market conditions driven usually by fiscal and monetary policy cycles, and usually accompanied by investor confidence about growth prospects created by some new idea or technology - eg railways, trade with new colonies, electricity, motorcars, telephones, radio, urban expansion, mineral discoveries, internet, etc. In the current boom it is ‘artificial intelligence’.
Second – markets are driven by wild human emotions (Keynes called them ‘animal spirits’ in his 1936 ‘General Theory’) like fear and greed (I actually prefer Charlie Munger’s ‘fear and envy’).
Irrational over-confidence leads people to bid up prices of assets to crazy high levels in the euphoric booms, and then irrational over-pessimism leads those same humans to suddenly dump those same assets, which creates devastating busts.
Instead of the usual: ‘History never repeats, but it does rhyme’ (which Mark Twain never actually wrote), I prefer François-Marie Arouet (‘Voltaire’, in Candide, 1759, ch.30) –
‘History never repeats itself. Man always does.’
It’s hard-wired into human nature. We can’t help it. Humans are herd animals. We follow the herd into wild booms, then we follow the herd in the stampede out.
Third - the boom-bust cycles on the Australian share market have always mirrored US share market boom-bust cycles. The timing is almost exactly the same (what happens on Wall Street is echoed next morning in Australia, regardless of local conditions here), but there are usually differences in the height of the booms and the depth of the busts in each country.
For more than a century the two markets have generated very similar overall returns, and they have followed the same booms and busts in almost all cases, but they have tended to take turns in which market has the bigger booms and the bigger busts – see:
The ‘big ones’
Looking at the main chart covering the 18 cycles, the big boom-bust cycles on the Australian share market over the past century have been:
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- Cycle 1 – the long 1920s boom, which ended with the devastating 1929-1931 crash. It is the only major crash that took the market back to lower than when it started a decade earlier. Ouch!
- Cycle 10 – the mid-1980s speculative boom that ended with the October 1987 crash, when the market index fell by -50% in just 19 trading days.
- Cycle 15 – the 2003-7 China / commodities / credit boom that ended with the 2008-9 GFC that took away almost all of the gains from the boom.
- Cycle 2 - was by far the longest bust of all, which started with the post-depression fiscal tightening in 1937, but was soon overtaken by the descent into war in Europe and then in the Pacific. This was an exception to the general rule that most busts are relatively short compared to the booms than precede them.
How long will the current boom last?
The left chart below shows the number of months in each boom, and the left charts shows the number of months in each bust:
The current boom (cycle 18) started at the bottom of the 20%+ sell-off in the 2020 Covid lockdown recession crisis. It has now been running for 67 months so far, which is longer than the median boom period (54 months).
There have been plenty of longer booms in the past, including the last one – cycle 17 (100.6 months) from September 2011 to the Covid lockdown recession sell-off in February-March 2020.
How long will the current boom last? Impossible to predict of course, but it is comforting to know that there have been plenty of longer booms in the past. General investor confidence can keep a boom going for many years before the boom finally ends.
Current boom quite moderate
Also, the current boom has been relatively moderate in terms of the slope upward from the start. Cycles 1, 2, 9, 10, and 15 were all significantly stronger (higher upward slopes) than the current boom.
Another observation from the pair of charts above is that the busts are a lot shorter than the booms. Overall, the market has been in boom phases for 79% of the total time, and in bust phases for just 21% of the time. The only exception was cycle 2 (1937-1942 into the first half of WW2).
How high can the current boom go?
So far (as at mid-November 2025) the market index has doubled since the start of the current boom.
It is impossible to predict how high the current boom will go of course, but there have been plenty of booms that went a lot higher.
The left chart below shows the percentage gains in each prior boom:
There have been plenty of booms where the market more than doubled, trebled, and even quadrupled before finally collapsing in the bust.
The highest boom was cycle 10 – the mid-1980s boom from July 1982 (starting in the middle of the early-1980s recession) up until the October 1987 crash. The market index rose an incredible +420% in that boom. But of course that boom ended with the devastating -50% fall in the October 1987 crash.
The busts take away most of the gains in the booms
We can see from the right chart above, and from the individual cycles in the main chart, that in most cycles the bust takes away most of the gains made in the preceding boom. In a couple of cycles the bust took the market lower than the start of the boom (cycles 1 and 7).
On average across all cycles, the busts took away 70% of the gains made in the preceding booms. In three quarters of the cycles (13 out of 17) the bust took away more than half of the gains made in the preceding boom.
Why is this important? Because many investors fall into the trap of chasing the latter stages of the booms (jumping in for the first time, or doubling down, or worst of all - gearing up). If you get in after the boom is already well on its way, you may enjoy the rest of the boom while it lasts, but you will probably lose all of the gains in the bust that always follows.
This problem is particularly prevalent for first-time investors who nervously wait on the sidelines working up their courage as the boom gathers pace, then inevitably take the plunge in the boom-time euphoria at or near the top of the boom.
What about pricing and valuations?
As in all booms, prices started out cheap at the start of the current boom (which was at the bottom of the previous crash where everything was over-sold and dirt-cheap). Also, as in all booms, prices have been rising more quickly than underlying profits and dividends, as over-confidence builds, so pricing is getting increasingly expensive. Same as in all booms.
Why do booms end?
The problem is that share markets don’t crash when or because they become expensive, or when they reach a certain level of over-pricing. Booms can keep on rising into increasingly over-priced levels for many years before some event or events trigger the eventual bust.
Another problem with pricing measures is that they are often very misleading. For example, at the top of the market near the end of the highest boom of all (cycle 10, the mid 1980s boom), The ASX market pricing was actually very cheap, and provided no warning of the crash that turned out to be sharpest crash of all (October 1987). See -
We don’t know, of course, what will trigger the end of the current boom, but markets can keep running up into extremely over-priced levels before the final trigger for the crash.
I spend a lot of time studying and analysing share market pricing and valuation levels – for example, see my recent six-part series on pricing of global share markets to better understand their implications -
For more on US profits and pricing – see:
The longer & higher the boom, the deeper the crash, and longer the recovery time
For the US, good examples were the 1920s and 1990s booms, which ran up for a decade before crashing into deep, long busts – and both were accompanied by long and deep economic contractions.
In Australia, examples of long and high booms followed by deep crashes that took a long time to recover include the 1920s boom (cycle 1), the 1960s mining boom which collapsed in a double-bust (cycles 6 and 7), the 1980s boom (cycle 10), and the 2000s China/mining/credit boom (cycle 15).
Government/central bank ‘put’?
There is a good chance that the current boom may run on for a lot longer yet. The ‘Greenspan put’ idea started in the 2000-2 tech wreck, gained prominence in the 2008-9 GFC, and was confirmed in the 2020 Covid lockdown recession crisis. The idea is that in this increasingly populist world, governments and their central bankers will bail out any crisis.
In the GFC and Covid crises, governments bailed out not only banks but inefficient commercial business that ordinarily would have been allowed to fail. They also cut interest rates to zero (negative in some countries) and threw free money at literally everyone and everything. Today there is widespread, and probably justified, confidence that governments and their central banks will do the same again.
As my good friend and former RBA governor Ian Macfarlane says – “ the downside risks are perceived to be small but the upside unlimited.”
But the boom will eventually end
The first thing we know is that the Australian share market boom will end when the US boom ends. Our bust will be milder because our boom was milder, just like the dot-com boom and tech-wreck bust (cycle 14).
Second - despite government/central bank efforts to support economies and markets, the current boom will end in pain for investors here and around the world.
There is a good chance it will be like the end of the 1990s ‘dot-com' boom, where the triggers for the bust included tightening monetary policy, plus a final realisation that the enormous amounts being spent on infrastructure (in that case it was fibre-optic networks) would not generate the promised returns. Boom-time over-confidence can quickly shift to pessimism and then over-pessimism when everybody starts racing for the exits.
There are often some other related or unrelated events that accelerate this sudden loss of confidence – for example, a military flare-up, or a sudden bankruptcy.
The critical element is what happens in the US – and the US boom has been far stronger than our local boom here. The Australian share market almost always US boom-bust cycles, so when (not if) the US tech boom crashes, our market will also be hit. The the equivalent analysis for US boom-bust cycles see:
Meanwhile, I am enjoying good returns as the boom continues – albeit into increasingly over-priced territory.
‘Till next time . . . safe investing!