There's no silver bullet, but here are 5 ways that might show where the market is headed

Valuation, voting and weighing

To be clear, valuations have little bearing on the performance of stocks over the short term. But their ability to predict returns over longer holding periods has been more pronounced. As Buffett once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

The combination of elevated valuations and further tightening by the Fed has caused the earnings yield of the S&P 500 to fall below the Fed funds rate, pushing market psychology from TARA to TIAGA . The S&P 500 has on average produced a real return of 9.3 per cent over the subsequent 12 months after the difference between 10-year U.S. Treasury yields and the Fed funds rate fell within the top quintile of the historical distribution . This contrasts with an average of minus 0.4 per cent when this spread has been in the bottom quintile .Article content

Given the strong historical connection between inverted curves and subsequent recessions, it follows that there is a distinct possibility of a recession occurring in the near term. Moreover, above-average valuations imply that equities are not materially discounting an economic contraction and an associated decline in company earnings.

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