I was trying to find a few funny jokes and analogies about bear markets that I could share. I found two jokes which are somewhat telling. The first joke is a conversation between two friends that starts with the first guy saying: "I heard you lost some money in the market, were you a bull or a bear?" The second replies: "neither just a plain and simple ass." The second concerns the definition of bull & bear markets. A bull market is when random market movements causes an investor to mistake himself as a financial genius, and a bear market is a 6 to 18-month period of time when the kids get less allowance, the wife gets less jewelry, and the husband gets less sex.  I think those are telling because they are jokes about the investors image of themselves, and not about the market. A bear market is like what happens to a dance floor at a party that is filled to capacity with sweaty faced dancers bogging down to "Celebration" by Cool and the Gang, when the band switches to a slow dance like "Summer Wind" by Frank Sinatra.  People leave the dance floor and wander back to their tables, some of the dancers continue to dance but switch to a slow waltzy rhythm. The dance floor thins out, but there are still some dancers. The party hasn't ended; people are just catching their breath, and waiting for the next irresistible tune.

The stock market, after all, is an index of the values investors place on a broad spectrum of companies. That value is subject to change over time depending on their outlook. The economy is organic in nature, subject to feedback loops, expansion and contraction. The value that investors put on companies in the short term sometimes is more a reflection of how they value themselves than a truly analytical view of the long term value of the companies they are buying and selling.  Is the S&P 500 market worth 10% less today than it was 6 months ago? Yes. That is because the rate at which earnings are "growing" has slowed. Is it worth 20% less? No. That is because the earning "quality" is improving. The market is just finding the price which reflects that. The average growth rate of earning for the S&P 500 over the last 5 years has run at a 9% rate versus its longer term average rate of 7%. The market got ahead of itself. Using a discount model one can calculate that the S&P 500 is a BUY! at $1840 and a SELL! at $2200. Everything in between is a spectrum of noise and short term expectations. If you look at what happened when there was a selling crescendo on February 11th the market bottomed out and bounced higher at roughly $1820. There were big buyers at that price, because even the most conservative institutional investor has a point where greed overrides fear. At a price of $1820 the stock market appears as close to a sure thing to return more than the ten year US Treasury as an investor will ever see in any one-year period. The smart money knows, at that price, their return will likely be 7% or higher in short order, and there is a good margin of safety.

The economic data is mixed. There has been a slow-down in "over-all" earnings growth. In fact, the total earning of the S&P 500 companies has been more or less flat for the last two years. However, over that same period the dividends paid out by the S&P companies has grown 12% each year. That is because the earnings that are being reflected in the market are from companies with healthier cash flow. As I pointed out in my last note the earnings of companies that are cyclical and capital intensive in nature (energy, metals, mining, manufacturing, and chemicals) have stagnated and fallen off, while the earnings in the less cyclical or less capital intense segments continue to slowly grow (telecom, health care, services, software, travel and entertainment). Eventually these higher quality earnings will be recognized for what they are and the market will push higher. It is hard to know on what day the market will decide to trade at its absolute low for the year, so keep dollar cost averaging in. Know that you are buying stocks on the lower half of the cost spectrum, and the cream is rising to the top. The market, barring any major geopolitical shocks or major Fed policy errors, should start to recognize more of those quality earnings latter this summer, and the dance floor will get filled up again.

Meanwhile, buy the stuff that pays you to wait like the VYM (Vanguard High Dividend Yield ETF.) Its boring, but it pays a tax advantaged dividend almost twice that of the ten year US Treasury. If your time horizon is more than 2-3 years, chances are if you buy this fund under $65/share you will be rewarded.