Here's My Disaster Scenario For Stock Prices...

Today's stock prices are so extreme that a drop of 40%-50% would not be a surprise.

Indeed, it would take a drop of this magnitude just to get back to average long-term valuation levels, let alone cheap.

Meanwhile, after 5 years of frantically pumping money into the financial system, the Fed is not only still going full bore (interest rates are zero) but facing ever-increasing pressure to ease off the gas.

So if stock prices do drop sharply, it doesn't seem likely that the Fed will be able to do much to help.

Meanwhile, corporate profit margins are still at all-time highs, wages are still at all-time lows, and average American consumers still have debt coming out of their ears.

So it seems likely that, at some point, profit margins will decline, wages will rise (we can only hope), and average American consumers will continue to rein in spending — none of which will boost further profit growth.

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