Monday Marks New Record Highs for Wall Street

Bank of America's better-than-anticipated profits and a major acquisition in the tech sector combined to help Wall Street inch slightly higher on Monday, minting new record highs for both the S&P 500 and the Dow Industrials. In particular, SoftBank's $32 billion acquisition of ARM Holdings pushed U.S. chip stocks, while the tech sector led the way higher on the S&P 500. The Nasdaq, which is a more tech-heavy exchange, outperformed both the S&P and the Dow.

According to Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, "The underlying catalyst is a breakout in economic optimism." As cyclical sectors take leadership positions and companies continue to revise earnings on an upward trend, the markets continued to take note. Bank of America's earnings report built on the recent progress for U.S. banks, which was initiated last week by JPMorgan. BoA's shares jumped 3.3 percent on Monday, pushing the S&P financial index .SPSY toward a 0.4 percent gain.

Monday's other results included a rise of 16.5 points, or 0.09 percent, for the Dow Jones industrial average, marking the seventh consecutive up day. The S&P 500 .SPX gained 5.15 points, or 0.24 percent, while the Nasdaq Composite .IXIC added an impressive 26.20 points, or 0.52 percent, to 5,055.78. With these results in mind, an increasingly large contingent of companies on the S&P 500 are expected to beat analysts' earnings estimates, according to data from Thomson Reuters.

The year-on-year decline in earnings of S&P 500 components is expected to slow to 4.5 percent in the second quarter, down from five percent in the first, while third quarter earnings are expected to turn positive, up to 1.5 percent, ahead of a more robust fourth-quarter profit of 9.1 percent.

"There seems to be a growing consensus that this is the trough of earnings for the S&P 500," Bucky Hellwig, senior vice president at BB&T Wealth Management, told Reuters. "If indeed it is, that can build some momentum on a fundamental basis going into the third and the fourth quarter."

Last week marked a turning point for both the S&P 500 and the Dow, as both shook off global economic uncertainty stemming from the Brexit vote to set new records for the first time in more than a year. Likewise, the S&P 500 posted 22 new 52-week highs and no new lows, while the Nasdaq Composite recorded 110 new highs alongside 23 new lows.

Analyst Study the Market to Predict Presidential Race

Since 1928, U.S. equities have correctly signaled the winner of U.S. presidential elections an astonishing 19 out of 22 times, according to Bloomberg. To determine the winner, one only needs to take a look at the S&P 500. When stocks are higher in the months preceding the vote, the sitting party wins at an 86 percent clip.

With this in mind, the economic climate looks promising for Hillary Clinton, though some financial analysts debate the reliability of this proven prediction technique. Currently the S&P 500 index is at a record high, but analysts suggest that the Federal Reserve stimulus has had a negative impact on the ability of stocks to signal economic health.

"The market is somewhat a mirror of the economy and the incumbent is at an advantage when it's relatively healthy," Crit Thomas, global market strategist at Touchstone Investments, told Bloomberg. "But there are always circumstances where the market could say one thing and not have the impact it suggested in the past, relative to the elections."

Most recently, the practice of handicapping politics with the stock market was put to the test in June, when stocks soared ahead of the U.K. referendum to exit the European Union. After the vote to secede, U.S. stocks lost five percent in just two days. Fast forward a few weeks, and the impact of the Brexit vote has all but vanished. Once again, the S&P 500 sits at an all-time high with a perfect record in picking the last eight elections, including the five-quarter retreat ahead of Obama's election in 2008, as well as the rise in four of the five months before his 2012 reelection.

Building on this precedent, Clinton's election prospects have mirrored the fluctuations in the stock market over the past eight months to a near-eerie degree. According to election odds compiled by the PredictIt option site, both Clinton and the S&P 500 peaked in November 2015 before bottoming out in February of this year. Republican Donald Trump, on the other hand, has recorded less predictable results. Clinton has recorded an 84 percent correlation with the market, while Trump's correlation is only 10 percent.

Before using equities as a thermometer for this year's presidential election, it should be noted that the stock market has rarely been as divorced from the economy as it has been over the past seven years. Near-zero interest rates spurred a return of 3.7 percent per quarter for the S&P 500 since March 2009, while gains in gross domestic product totaled just 0.9 percent. This gap is the largest since World War II.

Most analysts agree that the bull market is nearing an expiration date, as the 2,688-day period that started two months after Obama's first inauguration is now the second-longest rally in U.S. history. Add to that the fact that stock investors have been living with the ongoing withdrawal of federal stimulus for nearly two years, leading to a period with the worst earnings recession since 2009, and a lot could change in the five months to go before Election Day.

"Our normal systems, which tend to want to predict that things will remain constant, are being upset," added Brian Andrew, chief investment officer at Johnson Financial Group Inc. "That makes it a very uncommon year."

June Posts Largest Job Gains in Eight Months

On the heels of a first quarter lull, U.S. job growth surged to close out the second quarter, as factories and retailers boosted hiring rates. Still, tepid wage growth will likely see the Federal Reserve remain cautious about a potential interest rate hike.

Even with lukewarm wage growth, non-farm payrolls increased by 287,000 jobs in June, marking the largest gain since last October, according to the Labor Department. May results were revised down to show a rise of just 11,000 rather than the previously reported 38,000. According to Darrell Cronk, chief investment officer at Wells Fargo Wealth and Investment, the growth "affirms the economy is still on decent footing but it doesn't change the Fed's path."

Last month's increase greatly exceeded economists' forecasts, which predicted an increase of just 175,000 jobs. As more people entered the labor force, signaling confidence in the jobs market, the unemployment rate also rose two-tenths of a percentage point to 4.9 percent. On the wage front, growth remained slow. Average hourly earnings were up just two cents, or 0.1 percent, in June. Year-over-year, the wage gain is 2.6 percent following an advance of 2.5 percent back in May.

In terms of a potential interest rate hike, most analysts agree that June's strong job gains will have little impact in the near-term. The U.S. central bank has expressed a desire to wait on additional data to assess the long-term economic impact of the Brexit, including the potential for slower growth in Europe and a stronger dollar.

Following the first interest rate hike in nearly a decade last December, it now appears that a secondary hike won't occur this year. In its June 14-15 meeting, officials reiterated the importance of waiting for "additional data on the consequences of the UK vote." When this report was published on Wednesday, stocks rose sharply. The dollar climbed to a two-week high against the euro while U.S. Treasuries pared losses.

June's job bounce back comes in the midst of a slowdown in forward momentum for the labor market as a whole. Job gains averaged 282,000 per month in the fourth quarter, but that figure has decreased to just 171,500 per month on average throughout the first half of 2016. Economists suggest that this deceleration is to be expected due to the advanced age of the economy's recovery from the 2007-09 recession and the labor market being near full employment.

Meanwhile, the percentage of working-age Americans who are either employed or searching for a job rose one-tenth of a percentage point to 62.7 percent. Individuals who want to work but have given up searching and those working part-time because full-time employment is unavailable fell 0.1 percent from the previous month.

Republican Party Pushes for Return of Glass-Steagall

The GOP convention is underway in Cleveland, and a top adviser to presumptive nominee Donald Trump has indicated that the party plans to revive the Glass-Steagall Act in an effort to prevent big bank 'supermarkets'. The four related previsions of the U.S. Banking Act of 1933 limited securities, activities and affiliations within commercial banks and securities firms. The Depression-era legislation was repealed in 1999.

For critics of the banking industry, the repeal of Glass-Steagall played a direct role in the creation of too-big-to-fail financial institutions, which required enormous government bailouts following the explosion of the financial crisis in 2008. Though the repeal is often cited as a cause for the crisis, it's worth noting that two of the investment banks at the core of the recession, Lehman Brothers and Bear Stearns, were unaffected by the act's prohibition of combining investment and commercial banks.

"We believe the Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her," Paul Manafort, Trump campaign manager, told The Hill. "We are supporting the small banks and Main Street."

According to Manafort, the reintroduction of Glass-Steagall will be included in the party's platform, and analysts expect democrats to follow suit. Trump has also been critical of other banking reform measures, such as 2010's Dodd-Frank law, which introduced the most significant changes to financial regulation since the regulatory reform following the Great Depression. To date, the securities and investment industry has contributed roughly $32.5 million to Trump's opponent, Hillary Clinton, according to Open Secrets.

U.S. Shale Output Expected to Fall in August

U.S. shale production is expected to fall nearly 100,000 barrels per day in August, according to a U.S. government forecast released on Monday. This drop is expected to be the result of an ongoing hit to the industry from weak global crude prices. Total output is also expected to fall, plunging to 4.55 million barrels per day, according to the U.S. Energy Information Administration's drilling productivity report.

U.S. shale production has been on a steady decline since the price of crude slipped from above $100 a barrel in 2014. The price was about $45 per barrel on Monday. In line with this forecast drop, all of the major oil formations are expected to see production fall. Bakken production in North Dakota is expected to record its third monthly decline, dropping 32,000 barrels per day. Production from the Eagle Ford formation in Texas is expected to fall 48,000 barrels per day, marking the smallest monthly decline since March of this year. The Permian Basin in West Texas is expected to produce 6,000 less barrels per day in August, according to the report.

Total natural gas production has a similar outlook, with analysts forecasting a decline for a sixth consecutive month in August to a total of 45.7 billion cubic feet per day, which would mark the lowest level since July 2015. Still, the decline of just over 0.4 billion cubic feet per day would be the smallest monthly decline in three months.

In the Marcellus formation, which is the largest U.S. shale gas field, August output is expected to drop by less than 0.1 billion cubic feet per day from the previous month. This slim drop would be the sixth monthly decline in a row, dropping production to its lowest level since December. New wells are expected to record stronger results. Initial production during the first full month for new wells in the Marcellus formation is expected to edge up to a record high of 11.3 million cubic feet per day in August, up from 9.5 million during the previous year. If this prediction holds true, it would be the 16th consecutive monthly increase in initial production for a new well in the Marcellus.

Low Commodity Prices Boost Restaurant Earnings

Commodity prices hovered at some of the lowest levels in four years during the first half of the year, leading restaurant operators to strong growth. In the second quarter, food costs averaged down more than 15 percent on a year-over-year basis, according to the Restaurant Commodity Inflation Index. Despite the fact that these results marked the fourth consecutive quarter of double-digit deflation when compared with the prior year period, there's less certainty that this trend will continue for the remainder of the year.

Egg prices, for example, tumbled 64 percent in the second quarter, as compared to the previous year, while dairy dropped 20 percent and cheese fell 12 percent, according to Evercore ISI. This was great news for family-restaurant companies such as Denny's, which has a significant portion of its business skewed toward breakfast options. Still, Evercore's data suggests that earnings estimates for next year may be a bit optimistic. This is largely a result of weaker comp growth and anticipated wage inflation, which will more than offset recent commodity deflation.

In markets such as Los Angeles and Chicago, higher minimum wage requirements went into effect this month. Though beef prices were down 15 percent from 2015 and chicken prices eased 11 percent, these enlarged wages could be cause for concern. Pair this with signs that food commodity inflation has picked up, as evidenced by ARA's restaurant commodity index showing food costs averaged up 3.5 percent in the second quarter over the first quarter, and the first quarter of 2016, which was the lowest in terms of restaurant commodity index since Q1 of 2012, appears to be the bottom for the restaurant commodity index.

Despite the ARA index, not all restaurants are exposed to the fluctuations of the commodity markets. Restaurants adhering to the common practice of fixed-price contracts could be paying more or less than the commodity index averages. David Maloni, chief commodity strategist at the American Restaurant Association, added that the outlook for the third quarter is for "perhaps modest inflation. Maybe we seasonably tweak back a little bit in Q4 and then modest appreciation with seasonality in 2017."