“The world's favorite season is the spring. All things seem possible in May,” said Edwin Way Teal. And so it seemed during the past week as we witnessed a further improvement in investor sentiment and risk appetite, supported by the viewpoint that the worst of the credit crisis might be behind us.

The last week was characterized by investors increasingly taking the view that the worst of the credit crisis was over. They seemed to be shrugging off further substantiation of the dreadful state of the US housing situation, as they digested the latest round of quarterly earnings reports.

It’s Earnings, Stupid! Or so it seemed during the past week as the stock market took its cue from a host of better-than-feared earnings reports, propelling the S&P 500 Index 4.3% higher – a bigger gain than for the entire 2007. And what a swift turnaround it was after the market got “GE’d” and was in sackcloth and ashes by the close of the previous week!

I posted an article on the stock/bond ratio a few days ago, asking whether we were seeing a turning point of any importance in this ratio. In order to gain more clarity on this issue, I engaged the help of readers by posing the poll question: “How do you see the US stock/bond ratio six months from now?” The poll results are reported in this post.

Enjoy the read.

A sense of relative calm descended upon financial markets over the past week. Although fears about the outlook for the US economy persisted, a perception crept into markets that much of the bad news related to the credit crisis was now out in the open, with the result that the equity bulls had reason to feel rather pleased with their performance by the close of the week.

Is the worst of the credit crisis behind us? The short answer is that nobody actually knows. However, the so-called stock/bond ratio serves a useful purpose of indicating to what extent safe-haven buying of bonds as opposed to stocks is taking place, i.e. telling us the language of the market.

An interesting poll has also been included with the post.

Enjoy the read.

“This is one ‘mother’ of a market,” 83-year old market veteran Richard Russell aptly described what market participants were again faced with during the past week. Sentiment was fragile as the outlook was still dominated by the familiar cast of deteriorating economic data, housing woes and concerns about the financial sector.

What is the outlook for US bonds, especially as yields have edged up since their recent lows? Considering both technical and fundamental factors, I conclude that continued base formation is likely, but that long-dated bond prices could be hit hard once yields adjust to more realistic levels. Be careful – we're in injury time.

Phew – what a tumultuous week! Once again, the fall-out of the subprime mess had a lot to do with it. For some variety, however, it was not only financials that were in the limelight, but also commodities that corrected sharply.

Credit and liquidity issues ravaged the financial markets during the past week and resulted in plenty of white knuckles and shaky knees, climaxing on a particularly sour note on Friday with the Bear Stearns bailout.

Donald Coxe, Global Portfolio Strategist of BMO Financial Group, is one of a select group of analysts that have been remarkably right on the “big picture” investment outlook for many years. His recommended investment strategy therefore makes for appropriate reading, especially also in the light of the difficult juncture in financial markets.

The first week of March started off with a deepening credit crisis that appears to have pushed the US economy into recession. Richard Russell, 83-year old author of the Dow Theory Letters, remarked: “The end of a costly (for most) and difficult week. ... this market has darn near worn me out, and I don't wear out easily.”

A comparison of the US yield curve with the S&P 500 Index highlights a broadly inverse relationship, i.e. stocks fall when the yield curve steepens and rise when the curve flattens. Given the expectation that the yield curve may become steeper yet before the economy starts looking up, more downside may be in store for US stocks.

A laundry list of ominous economic reports, continuing worries about the credit insurers, more news of mortgage-related write-downs and talk of hedge funds facing margin calls served up the perfect storm of investor anxiety last week.

The upshot of rapidly rising inflation in Asia could not only result in stronger Asian currencies, but also in reduced Asian investment in Western bond markets and, over the longer term, the need for higher real rates in the West with commensurate implications for lower economic activity.

Of immediate consequence: be very careful of overvalued US and EMU government bonds.