War and Peace: History Rhymes, But Which History?

It is said that history doesn’t repeat itself, but rhymes, but investors need to be careful about what history they study.

As I prepare for retirement at the end of March, I want to impress upon readers the importance of looking under the hood of past quantitative history studies in order to understand underlying assumptions.
 

Consider, for example, this timely study of U.S. equity returns after geopolitical and economic shocks. The accompanying table from Ryan Detrick of Carson Investment Research would lead to the conclusion that investors should ignore shocks and buy the dip, as the stock prices tend to shrug off short-term setbacks and rise over time.
 

 

A different table from Jeffrey Hirsch at Almanac Trader tells a slightly different story. Hirsch excluded some of the more minor shocks in his event study such as the Asian Financial Crisis and Brexit. Average and median returns are directionally similar inasmuch as stock prices tend to react to the initial shock and then rise afterwards, but the magnitude of the returns is dissimilar to the Detrick study. In addition, post-shock returns improve significantly if investors focus on the post Iran Hostage Crisis period. The worst of the initial short-term price shocks were attributed to World War II and the early days of the Cold War.
 

 

In short, how you choose your data sample will affect your return expectations.
 

 

Beware of Regime Shifts
The CFA Institute Research Foundation published in 2025 a Paul McCaffrey review of Jeremy Siegel’s seminal study of long-term U.S. asset returns (see Stocks for the Long Run? New Evidence, Old Debates). McCaffrey raised a number of important issues in Siegel’s work.

First of all, McCaffrey observed a regime change in inflation. The U.S. underwent a series of inflationary and deflationary shocks in the 18th and 19th Century, but deflation disappeared when FDR moved the U.S. off the rigidity of the gold standard.
 

 

The principal driver of these inflation and deflation cycles was war and peace. Wars created inflation, and the ensuing peace resolved in deflationary busts. This was a feature, not a bug, of the gold standard. Edward McQuarrie, who conducted this study of inflation, said, “No one cares about gold, particularly not during the century-plus when it was simply cash.”
 

 

The key takeaway for investors is “beware of possible regime shifts”.
 

 

The Dividend Regime Shift
McCaffrey also highlighted a study by Rob Arnott that dividends formed the lion’s share of historical equity returns:

In a 2003 Financial Analysts Journal Editor’s Corner piece, “Dividends and the Three Dwarfs,” Arnott shared a chart showing that prior to the post-World War II era, dividends were responsible for most of the long-term return of equities. Inflation, real income growth and “revaluation alpha” contribute too, but to a much lesser degree.

 

In Arnott’s update of that graph through mid-2022, again, dividend income was the largest return driver. “Buying stocks in 1800 (using Schwert data), and earning only the dividends, with no other source of return, gets us 26,500 times our money,” he explained. “Inflation [red] magnifies that 30 times in nominal (but obviously not in real) terms. Real dividends [orange] have grown 10 times in 220 years (1% per year). And revaluation alpha [yellow] finishes the job, as investors today pay four times as much for each $1 of income as in 1802.”

 

 

Even then, equity markets underwent a regime shift in the 20th Century when it came to dividend policy:
According to Laurence Siegel, “In the 1800s, many companies paid out all the earnings as dividends, keeping the stock price stable and making the stock essentially into an income bond.” An income bond, now rarely found in the markets but important historically, is one with variable interest rate linked to the profits of the issuer.

“Nineteenth century stocks were basically high-yield bonds with a possible growth kicker,” Arnott concluded. “The Stocks for the Long Run graph shows stocks as producing a near-linear return (in log space) for 200-plus years, but the equity risk premium looks like a hockey stick with an inflection at mid-twentieth century. Plus, other countries look very different.”

 

 

Why Aren’t We All Rich?
Paul McCaffrey wrote a 2026 update to his original article (see Stocks for the Long Run Revisited: Dividends and “the Return Nobody Got”). Laurence Siegel, in the forward, asked the rhetorical questions:

Why aren’t we all rich? Equity markets have delivered stunning returns. A dollar invested in 1871 grew to more than $20,000 in real terms by 2025. In nominal terms, it is, to quote the jazz standard, “How High the Moon”, that dollar would now be worth half a million.

 

Surely somebody’s great-grandparents invested in the U.S. stock market during Ulysses S. Grant’s presidency and forgot they owned the shares, leaving vast wealth to their heirs 154 years later. Why don’t we hear these stories?

Laurence Siegel makes a good point. Jeremy Siegel’s estimates of equity returns don’t seem to pass basic sanity checks. Assuming that the estimate of a 6.8% real return is correct, a family or dynasty who invested $1 about the time of Augustus Caesar would have a wealth stash with 57 zeros after it 2000 years later, and that’s in real inflation-adjusted terms.

Laurence Siegel attributed the differences in modeled and actual realized equity returns to a number of key factors:

• Most dividends were consumed, and these constitute much of the market’s total return, especially before about 1990.
• It was impossible to buy an index fund until 1976.
• The data on market returns are before taxes, but most people have to pay taxes.
• Generational wealth dissipates over time as the number of descendants expands, heirs spend money, and “life happens.”

Frictional costs from implementation, trading, taxes and individual investor needs (“live happens”) erode returns. When you combine that with the negative corrosive effects of lower compounding, what investors achieve and what investors may project based on long-term historical studies will be very different.
In other words, your mileage will vary — and a lot.

War and Peace
I began this publication by highlighting S&P 500 returns in response to geopolitical events and other shocks. I would further argue that such studies contain a key survivorship bias problem. Historical studies of U.S. financial asset returns span 100 years or more, isn’t that enough?

Paul McCaffrey observed in Stocks for the Long Run? New Evidence, Old Debates:

The United States has not fought a high-level, sustained conflict on its soil since the 1860s, and it emerged from the two world wars and the assorted social and political upheavals of the 20th Century better than most other countries. Few nations have enjoyed more than a century and a half of such relative stability. This means that the U.S. example may not be transferable to the rest of the world.

Remember the stories emerging in late 2024 of numerous UFOs or UAPs that seemed to have appeared everywhere? At the time, I speculated what might happen to asset prices if extra-terrestrial intelligence were to have a meaningful role in human affairs (see Asset Returns Under an Alien Invasion). The catastrophic scenario would be a wipeout of human civilization, much like how investors suffered a total loss of capital when a country is defeated in war or rebellion. A more benign assumption postulated a peaceful coexistence, with lower returns, much like how the markets of major European powers fared starting from the onset of the 20th Century. France and Britain survived, but what happened to Germany and the Austro-Hungarian Empire?
 

Then there was Russia. Here is the history of another catastrophic disruption. Did you know that the Russian stock market beat the U.S. market during the latter half of the 19th and early 20th Century?
 

 

This study represented 52 years of history. Is that enough to form long-term return expectations? Anyone who bet on Russia after 52 years of outperformance would have been disappointed.
 

What happened next was the Russian Revolution. Asset holders would have been far more concerned about their own survival than the value of their portfolios.
 

 

Ray Dalio presented a broad study of historical drawdowns of 60/40 returns in different countries. Markets can go to zero or nearly zero under conditions of severe stress.
 

 

Putting it all together, conventional studies of U.S. asset returns are creating overly unrealistic expectations of long-term asset returns. The U.S. experience has severe survivorship problems. At the start of the 20th Century, the U.S. was one of several promising emerging markets, much like Brazil, which experienced subpar returns. Projecting asset returns expectations based on the U.S. experience is like trying to project returns based on the history of Apple since its IPO. A more diversified portfolio of major computer manufacturers of IBM (mainframes), Digital Equipment (minicomputers) and Apple (microcomputers, as they were called then) would not have performed as well. Similarly, the major publicly listed players in microcomputers at the time were Apple, Tandy (Radio Shack), Commodore International and Atari, which was a division of Warner Communications. Where are those companies now?

As I fade into the sunset in retirement, I leave investors with the thought that they should conduct their own due diligence about their own possibly overly rosy historical assumptions about long-term risk and return expectations. By all means, adopt a cautiously bullish view, but be vigilant about the possibility of regime shifts. In the words of Ronald Reagan, trust (the markets), but verify (that the regime hasn’t changed).

That said, I don’t mean to sound like a doomster about geopolitical tail-risk. Tactically, equity markets should bounce back to their long-term trend in the aftermath of the Iranian conflict, though investors may see some tectonic geopolitical shifts depending on how the war is resolved, but that’s a discussion for another day.