Dan Rasmussen – Investing Through a Crisis - [Invest Like the Best, EP.163]

Episode Summary

Executive Summary: Patrick O’Shaughnessy interviews Dan Rasmussen about his two-year study of past crises and what the base rates say about investing through the COVID sell-off. They argue crises make returns more predictable, favor value, small cap, and high yield, and punish expensive growth and illiquidity.

Main Topics: Crisis base rates and methodology (Priority: 5/5): Rasmussen explains a two-year study of crises since 1970 using high-yield spreads and newspaper readings. Market stress and asset-class damage (Priority: 4/5): The conversation maps the rapid drawdown across equities, credit, and riskier segments of the market. Why crises become more predictable (Priority: 5/5): In panics, psychology and liquidity effects repeat, making factor behavior more consistent than in bull markets. Credit investing during crisis (Priority: 5/5): He says high yield can outperform in crises if investors focus on quality, size, and reasonable yield. Value, size, and factor rebounds (Priority: 5/5): The discussion argues value and small caps usually rebound strongly after crisis-driven selloffs. Momentum and multi-factor construction (Priority: 4/5): Momentum is framed as a risk warning, while blended factors help avoid both overvaluation and bankruptcy.

Key Arguments: High-yield spreads above 650 basis points define crisis periods in the study. Value, size, and quality factors work better in crises than in normal markets. High yield can be attractive in crises if investors avoid low-quality reach-for-yield names. Small caps historically lead recoveries after major drawdowns. Expensive growth can keep compounding, but valuations matter most when catalysts arrive. Momentum helps manage risk, but can be weakened by crisis-driven liquidity selling.

Data Points: Study period: about two years - Time spent researching every economic crisis since 1970 Crisis definition: high yield spreads went above 650 - Threshold used to identify crisis months High yield spread threshold: one standard deviation above average - Rationale for the 650 basis-point cutoff S&P 500 drawdown: nearing a 30% almost drawdown - Current market selloff discussed in the episode Small-cap drawdown: down nearly 40% - Current market selloff in smaller equities International small value drawdown: mid-30s draws - Current market selloff outside the U.S. large-cap index High-yield CCC performance: down 15% since the end of January - Worst-quality high-yield segment High-yield single B performance: down 10% - Current selloff in high-yield credit High-yield double B performance: down 7% - Current selloff in high-yield credit Investment grade AA performance: down 1% - High-quality credit during the selloff Investment grade A performance: down 1% - High-quality credit during the selloff Investment grade triple B performance: down 5% - Upper end of investment-grade credit Crisis duration: one to three months - Shortest time high-yield spreads stayed above 650 in the sample Crisis duration: over 12 months - Longest time high-yield spreads stayed above 650 in recent memory, in 2008 Value win rate in normal markets: 66% - High-minus-low factor outperformance in non-crisis months Value win rate in crisis markets: 91% - High-minus-low factor outperformance in crisis months Conservative-minus-aggressive win rate in normal markets: 46% - CMA factor performance in non-crisis months Conservative-minus-aggressive win rate in crisis markets: 74% - CMA factor performance in crisis months Small-minus-big win rate in normal markets: 51% - SMB factor performance in non-crisis months Small-minus-big win rate in crisis markets: 71% - SMB factor performance in crisis months High-yield yield: a little over 8% - Current high-yield market level cited for investors Double-B yield: a little over 6% - Current double-B high-yield level cited for investors Prospective high-yield returns: high teens or low 20s - Potential returns if markets normalize 1929 recovery in large cap: 12 years - Time for large caps to regain prior peak after the crash 1929 recovery in small cap: 4 years - Time for small caps to regain prior peak after the crash Small-cap rebound after 1932: up over 800% - Small-cap performance in the four years after the bottom Worst decile momentum rebound: up an average of 236% - From March 2009 to March 2010 U.S. GDP growth in 2009: down 2.8% - Example of a major shock leading to a severe crisis Stock market in 2009: down 60% - Referenced as part of the financial crisis Valuation spread: levels we haven't seen since 1999 - Ratio of most expensive 10% of stocks to cheapest 10%

Pivotal Quotes: "bear markets are all alike, but every bull market is different in its own way." — Dan Rasmussen: He describes why crisis behavior is more repeatable than boom-period behavior. "The loudest voices in the room are the people that were right most recently." — Dan Rasmussen: He warns that recent bearishness can dominate investor sentiment and media narratives. "markets will go up before business conditions start going up." — Dan Rasmussen: He argues prices turn before fundamentals and public health headlines improve.

Implications: The main open question is timing, but the playbook is clear: use valuations and liquidity signals to stage back into risk rather than waiting for perfect certainty.