Scenario No. 2 -- Near-Recession (15% probability): The U.S. enters a near-recession (zero to +1.5% real GDP). The Fed extends quantitative easing throughout the year, but it becomes clear that monetary policy has lost its effectiveness. The eurozone turns back into negative real GDP growth, and the debt crisis renews. China's real GDP falls below +7%. The Democratic and Republican Parties grow more contentious, partisan and unequivocal in position. The sovereign debt crisis in Europe heats up again, contributing to a deepening European recession and a hard landing in China and India. The yield on the 10-year U.S. note dips below 2% again. S&P 500 earnings estimates for 2014 are materially reduced (relative to consensus expectations) to a range between $95 and $100 per share. Stocks, valued at 14x under this outcome, have 22% downside risk over the next 12 months. S&P target 1365.

Scenario No. 3 -- Below-Consensus Economic Growth (50% probability): The U.S. experiences a disappointing +1.5% real GDP growth rate, Europe experiences little recovery (zero to +1.0% real GDP), and China's economic growth modestly disappoints relative to expectations. The Fed announces a plan to extend its QE program and doesn't taper in 2014. The yield on the 10-year U.S. note is held between a range of 2.25% and 2.75%. The S&P 500 consensus profit forecast for 2014 is too high ($110 to $112 per share is expected), as corporations' pricing power is limited and profit margins are pressured more than expected. Stocks, valued at 14.75x under this outcome, have 6% downside risk over the next 12 months. S&P target 1635.

Scenario No. 4 -- Muddle Through (30% probability): The U.S. muddles through, with 2.0% to 2.5% real GDP growth; the European economies post a modest recovery (+1% real GDP); and China's economy grows in line relative to consensus forecasts. The Fed's tapering begins in March 2014. The yield on the 10-year U.S. note is between 2.75% and 3.25%. S&P 500 profits for 2014 are in the range of $112 to $114 a share as some modest margin slippage occurs. Stocks, valued at 15.5x under this outcome, are now fairly priced. S&P target 1750.

How Do I Use My Fair Market Value Exercise in Actual Practice?

"He who lives by the crystal ball soon learns to eat ground glass."

-- Edgar R. Fiedler in "The Three Rs' of Economic Forecasting -- Irrational, Irrelevant and Irreverent" (June 1977)

The investment mosaic is a complicated one; it makes the riddle of the Sphinx seem simple by comparison.

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