Is this the Market Correction we had to have?

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ANOTHER day, another plunge. The main Wall Street benchmark S&P 500 fell 1.65% to 1,874 points last night, its worst three day drop since 2011. The US dollar continued to strengthen and oil slipped to US$ 88.88 for a barrel of Brent crude.

The latest sell off comes just three weeks after the last peak. On Friday September 19, 2014, Alibaba Holdings raised over US$ 25 billion in an initial public offering in New York. The Chinese e-commerce giants saw its shares soar 38% on its listing day.

Did the spectacularly successful IPO also mark a market top?

The day before Alibaba made history on the New York Stock Exchange the S&P 500  Index touched 2,011.36 points, a new record. Since then the S&P 500 has been on a slippery slope. It is now down more than  7% from its three weeks ago peak. And Alibaba? Well, its shares are down over 9% from its own opening day peak.

But the S&P 500 which was up 30% last year, is still up 3.06% so far this year despite the post Alibaba pullback. The less well followed Dow Jones Industrial Average of 30 large cap American stocks is up 1.6% this year and Tech heavy Nasdaq Composite Index is up 1.8% this year though it is down 10% from its recent peak last month. The Russell 2000 the US small cap index which plunged 3.3% last week is down nearly 11% from its own peak earlier this year.

In short, US stocks have been on a downward slope.

Asia has been taking its cue from what’s going on in Wall Street and stocks in the region have slipped almost as much or in some markets a lot more than  US equities. Little wonder then that after last Friday's selling in the US, investors in the region saw their own markets sold off as well when trading opened this morning.

The Straits Times Index was down 21.72 points on Monday or 0.67% and began the day with more losses.

Elsewhere the selloff was even heavier.

Tokyo’s Nikkei 225 was down 1.4%,Taiwan’s Weighted Index was down 2.84%, the Philippines PSE Index was down 2.78%, Jakarta Composite 1.01% and in Kuala Lumpur the  FTSE Bursa Malaysia’s KLCI 0.065.

The only Index in the region apart from Mumbai’s  Sensex was Hong Kong’s  Hang Seng Index which started down but eked out gains to close up on Monday as investors saw a silver lining in the tail end of student protests as well as the upcoming Through Train Stock Connect next week which allows mainland Chinese to buy Hong Kong stocks.

How long will the selloff in the US last? And how long will Asian stocks continue to be dragged down because global sentiment for equities remains poor?

This is not the beginning of a new bear market says John Higgins, Chief Markets Economist for Capital Economics in London.

“Bear markets typically only occur in, and around, recessions, rather than in the middle of entrenched recoveries,” he notes.

 If you Google it, you might find that a popular definition of a bear market is a peak-to-trough decline in stock prices of at least 20% over a period of at least two months. The S&P 500 has experienced nine such bear markets since 1950. There have also been ten official recessions over the last 64 years.

 While most bear markets are a canary in the coal mine of recessions not all stock slumps are harbinger of gloomier economic climes.

 For example, the Black October sell off of 1987 which saw stock prices collapsing 34% was followed by a rebound and in its wake no recession followed.

As prospects for the next 12 months go, with its economy set to grow at least 3% over the next year, the US is probably the best house in a fairly rough neighbourhood.

 Unemployment rate in the US is down to 5.9%, consumer confidence is up as house prices have risen from their lows of 2009 and it is primarily due to the strength of the economy that the Fed is ending tapering this month and looking at hiking interest rates next year.

The real fault lines in the global economy lie in Europe, Japan and China.

No matter what the IMF latest economic report tells you, Europe is now clearly flirting with a recession  again. In January, the betting was the Eurozone will eke out  up to 1% growth this year.

Those forecasts were later cut to 0.5%, Now there are some forecasts Eurozone will be lucky to eke out any growth for current calendar year and might see growth not much above zero next year. Following a disastrous consumption tax hike Japan's recovery seems to have derailed as well and real estate woes are weighing on China's growth.

The good news is that some of the bad news around the US is turning out to be not that bad. The Fed which was expected to raise interest rates between April and June next year might now delay the hikes if global growth continues to slow. That will be a positive for US equities.

While the strong U.S. Dollar is likely to weigh on US corporate earnings particularly in the current quarter, stronger domestic growth will likely mitigate most if not all of it. Cheaper commodities, particularly cheaper oil, is helping bring down costs for US companies which at this stage of growth are normally more concerned about rising costs.

At just 15 times next year's expected earnings US stocks are clearly not expensive. If the dollar stabilizes at current levels it will remove another uncertainty. With average earnings growth of over 5% next year plus 3% dividends, US stocks could have a decent upside.

And when Wall Street starts singing, Asian markets are likely to take a cue as well. There may be a sharp downward leg in coming weeks as correction takes its course ,but valuations look reasonable.