WALL Street's sharp losses last week - the Dow Jones Industrial Average fell 386 points or 2.3 per cent and the S&P 500, about 50 points or 2.7 per cent - have been described by sources as a "much needed correction", particularly since they were led by the frothy, momentum-driven technology and biotech sectors. Once the shake-out or consolidation is completed, conventional wisdom born of experience gleaned from similar routs over the past five years is stocks should resume upward march. Adding to this confidence were the minutes of the recent Federal Open Markets Committee meeting, which reaffirmed the Fed's dovish stance on interest rates.

Maybe so, but it would be a mistake to assume that the US market can quickly add to the half-dozen all-time high records it has set this year and the 50 last year. Those highs were reached without any major moves in the bond market, suggesting there has been no panic selling of stocks and no major flow of money into bonds - yet. This could now be changing. On Friday, the 30-year Treasury yield closed at its lowest since July last year. A fall in yields was to be expected - when stocks plunge, some capital will seek the safe haven afforded by bonds. The motives, however, behind the bond rallies in the two periods may have been different. Nine months ago, stocks were weak because of worries the US economy was growing fast enough to justify the Fed tapering its monetary stimulus, which would have spelt an end to the liquidity-driven rally of the last few years.

This time, liquidity is not the issue - having given markets ample time to brace themselves, the Fed has now tapered three times since December, bringing its monthly bond purchases down from US$85 billion per month to US$55 billion. So it is likely that this time, it is worry over the recovery that is the problem. In calling for bolder actions to keep growth on track, the International Monetary Fund's (IMF) Christine Lagarde last week said the global recovery was "too weak for comfort". Separately, in a research report last week, the IMF noted although real interest rates have been declining since the 1980s and are now in slightly negative territory, this has failed to boost the productive investment that is vital in generating demand for labour and capital.