Stocks recover after election surprise

NEW YORK (CNNMoney.com) -- The Nasdaq led a broader stock market recovery Wednesday afternoon, as investors set aside morning concerns about the possibility of the Democratic Party controlling Congress.

The tech-fueled Nasdaq composite (up 12.40 to 2,388.28, Charts) added 0.5 percent, with roughly 30 minutes left in the session.

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The Dow Jones industrial average (up 29.78 to 12,186.55, Charts) added 0.2 percent after hitting a record trading high in the previous session. The broader S&P 500 (up 3.71 to 1,386.55, Charts) index added 0.3 percent.

Stocks had slipped in the morning and struggled in mixed trade in the afternoon as investors mulled news out of Tuesday's Congressional election.

Results showed that the Democrats had taken control of the House of Representatives, as expected, and were also possibly on track to take control of the Senate, which had not been expected.

Investors were dealt another surprise Wednesday afternoon: news that Defense Secretary Donald Rumsfeld will resign, to be replaced by former CIA chief Robert Gates.

However, the change reflected broad criticism of Rumsfeld's orchestration of the war in Iraq and seemed to be taken well by stock markets.

By the mid-afternoon, stocks were back in positive territory, with technology and energy the most upbeat sectors.

Stocks rallied Monday and Tuesday as investors geared up for Tuesday's Congressional elections, with many on Wall Street expecting the Democrats to take control of the House of Representatives, but for the Republicans to hold on to the Senate by a slim majority.

The Democrats did take control of the House, for the first time since 1994, as expected. But it was still unclear Wednesday afternoon as to which party will control the Senate, due to an undecided race in Virginia. Earlier in the afternoon, a second undecided race, in Montana, was projected to go to the Democratic candidate.

Regardless of the outcome, the impact is more likely to be felt by individual stock sectors rather than the broader market, analysts said.

"I think the market had basically factored in that there was going to be a change in the political landscape," said Ted Weisberg, a New York Stock Exchange floor trader at Seaport Securities.

"Whether you have the Democrats controlling the House or controlling both houses, you still have a Republican leader in the White House and that still means gridlock," he added.

Gridlock would limit the power of either party to push through legislation perceived as partisan, an environment acceptable to the markets.

Beyond the election, stocks are likely to continue the recent advance, with the positives that have boosted the market for months remaining in place. They include: strong earnings, the belief that the economy is headed for a so-called "soft landing" and supportive Federal Reserve policy regarding interest rates.

A variety of big technology stocks rose, including Yahoo! (up $0.45 to $27.06, Charts) and Apple Computer (up $1.47 to $81.98, Charts).

Cisco Systems (up $0.49 to $25.33, Charts) climbed ahead of its quarterly earnings, due tonight after the close.

Microsoft (up $0.12 to $29.07, Charts) shares were little changed after the software leader said that its long-delayed Vista is complete and ready to be shipped.

Among decliners, pharmaceutical, healthcare and defense stocks were under pressure, reflecting the possibility of a Democratic congress.

Dow losers included Pfizer (down $0.39 to $26.66, Charts), down 1.5 percent, Johnson & Johnson (down $0.89 to $67.82, Charts), down 1.3 percent and Merck (down $1.71 to $44.19, Charts), down 3.8 percent. Merck was also under pressure on news that it is facing $5.6 billion in tax liabilities related to accounting for past transactions.

Defense stocks slid on bets that a Democratic congress would cut spending, including Lockheed Martin (down $0.97 to $86.52, Charts), Northrop Grumman (down $1.17 to $65.23, Charts) and Raytheon (down $0.55 to $49.13, Charts). Dow stock Boeing (up $1.05 to $85.60, Charts) had fallen in the morning, but recovered in the afternoon.

Stem cell research companies rose on bets about the new Congress, including news that Missouri voters approved a measure guaranteeing federally-supported research and treatment in the state. Shares of StemCells (up $0.29 to $3.36, Charts) and Geron (up $0.30 to $8.68, Charts) both climbed.

Oil stocks rose along with the price of the raw commodity, giving the market some strength. The Amex Oil (up 17.61 to 1,168.08, Charts) index added 1.5 percent.

Among other stock movers, Hospira (down $5.07 to $32.73, Charts) slumped nearly 13 percent in unusually active trading after the maker of specialty pharmaceuticals reported quarterly earnings that fell from a year earlier and missed forecasts by a penny-a-share.

Market breadth was positive. On the New York Stock Exchange, winners topped losers five to three on volume of 1.41 billion shares. On the Nasdaq, advancers beat decliners three to two on volume of 1.80 billion shares.

U.S. light crude oil for December delivery rose 90 cents to $59.83 a barrel on the New York Mercantile Exchange. The price of oil had risen even more after the morning release of the weekly inventory report, which showed a smaller-than-expected rise in crude supplies.

Treasury prices rose modestly, lowering the yield on the 10-year note to 4.64 percent from around 4.66 percent late Monday. Bond prices and yields move in opposite directions.

COMEX gold fell $9.40 to $618.30 an ounce.

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Gearing up for gridlock

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