History offers fascinating lessons — the twentieth century was no exception. In the book Triumph Of The Optimists: 101 Years Of Global Investment Returns (2002), Elroy Dimson, Paul Marsh and Mike Staunton offer the most complete study of historical global market returns. The book documents market returns for 16 countries from 1900 to 2000. From this research, it is evident that three important changes took place in the global stock market in the last century: the U.S. achieved market dominance; the exchanges were consolidated; and secular sector rotation occurred. Unfortunately, understanding the past doesn’t necessarily make predicting the markets’ future any easier. Read on to learn what happened in the past century and why some experts say history may not be destined to repeat itself.

To the Winner Go the Spoils

Unfortunately, until Triumph Of The Optimists was published, most of the available historical stock market data for the years prior to 1970 was only for the U.S. market. This isn’t surprising, since the U.S. stock market was the big winner of the twentieth century. Its weighting increased to 47% of the world’s total and, in general, it performed more favorably than the rest of the world’s markets. This occurred for a number of reasons, but chief among them were larger investments in physical and human capital. greater technological advancement and greater productivity growth. With its huge investment demand and technological superiority, the U.S. investment industry was a worldwide leader. (To learn more, see What Are Economies Of Scale? .)

By contrast, other countries have lesser-known histories. For example, it took the U.K. much longer to recover from the world wars. Its diminished role after the collapse of the British Empire and the complicated bureaucracies of the colonial system slowed the U.K.’s growth immeasurably. According to the authors, problems with defense spending, labor, productivity and investment plagued the British economy and markets until the mid 1970s.

The U.S. on the other hand, suffered relatively little disruption to its stock market during the world wars and didn’t have the prolonged declines that many of the European and Asian markets experienced. In fact, the United States’ economy largely benefited from the wars — successful companies such as General Motors and IBM thrived as a result. At the same time, many other economies suffered great losses. For example, according to Phillipe Jorion and William N. Goetzmann in their article Global Stock Markets In The Twentieth Century (1999), the Japanese stock market saw a 95% decline in real returns between 1944 and 1949! The German market also suffered devastating losses. In this context, the U.S. market’s success seems to be an exception, which the previous lack of data for other countries may have obscured.

Past Success and Future Performance

Many valuable lessons can be learned from history, but extrapolating historical returns into the future is difficult and complicated. For instance, few investors in 1900 could have predicted the monumental changes that would take place in the world after 1913. The two world wars, socialist revolutions, the Great Depression and the Bretton Woods Agreement all had a profound impact on the global economy and stock markets until the 1970s. The impact of these events suggests that although we can study the past, the social and economic events that might affect the markets in the future are often unpredictable. (For more insight, see Dollarization Explained and What Is the International Monetary Fund? )

Furthermore, despite the clear success of the U.S. markets since 1900, investors need to remember that this exceptional performance may be just that: the exception, rather than the rule for the twentieth century. Triumph Of The Optimists argues that economic and stock market performance in the U.S. has not been typical of other countries and, therefore, should not necessarily be extrapolated into the future.

The graphs below show a breakdown of the world markets in both 1900 and 2000 and the anomalous growth of the U.S. market during this time.