Stocks jump as Wall Street thinks tight U.S. election means gridlock

NEW YORK (Reuters) - U.S. stocks surged to close higher on Wednesday as the presidential election race remained cloudy but the likelihood of gridlock in Congress made investors optimistic that major policy changes would be difficult to enact.

Both President Donald Trump and Democratic nominee Joe Biden still had paths to reach the 270 Electoral College votes needed to win as states kept counting mail-in ballots. Biden held a narrow lead in Wisconsin while Trump’s campaign said it had filed a lawsuit to try and halt vote counting in that state.

A surprise win by Republican Senator Susan Collins in Maine dimmed hopes by Democrats that they could get control of the U.S. Senate.

Growth stocks .RLG, currently comprised of a large portion of names in areas such as tech, surged 4.31% as investors expected them to keep outperforming value stocks as they have in recent months. Value names .RLV, which closed flat, are currently comprised of mostly cyclical stocks such as banks and energy.

“Even if Joe Biden wins the Presidency, it looks like we are going to have a divided congress so the opportunity to have meaningful change at the fiscal level is pretty slim, and that is what is being priced into the back end of the market today,” said David Joy, chief market strategist at Ameriprise Financial in Boston.

“If we are going to have a similar type of economic environment as we’ve had, then we are going back to an emphasis on trying to find earnings in a relatively scarce earnings environment, back to the same winners as before.”

(GRAPHIC: 2-year performance of growth and value - )

The Dow Jones Industrial Average .DJI rose 367.63 points, or 1.34%, to 27,847.66, the S&P 500 .SPX gained 74.28 points, or 2.20%, to 3,443.44 and the Nasdaq Composite .IXIC added 430.21 points, or 3.85%, to 11,590.78.

A nearly empty trading floor is seen as preparations are made for the return to trading at the New York Stock Exchange (NYSE) in New York, U.S., May 22, 2020. REUTERS/Brendan McDermid/File Photo

It was the biggest daily percentage gain for the S&P 500 since June 5 and for the Nasdaq, since April 14. Still, advancing issues outnumbered declining ones on the NYSE by just a 1.36-to-1 ratio; on Nasdaq, a 1.26-to-1 ratio favored advancers.

The S&P healthcare index .SPXHC jumped 4.45% to close at a record high, and the information technology sector .SPLRCT also gained strongly, as a divided Congress means slimmer chances for heightened antitrust scrutiny, capital gains taxes and a restoration of parts of the Affordable Care Act. The healthcare index notched its biggest daily percentage gain in about seven months.

Still, investors said they favor a definitive, swift resolution of the presidential race that would clear the way for a deal on a stimulus package to revive the economy.

The NYSE FANG+TM Index .NYFANG, which includes the core FAANG stocks such as Apple AAPL.O and Amazon .AMZNO jumped 4.34% .

Shares of defense contractors Northrop Grumman NOC.N, Lockheed Martin LMT.N and Raytheon RTX.N all rose on receding chances of a cut in the defense budget.

Big Pharma Pfizer PFE.N, Merck & Co MRK.N and Johnson & Johnson JNJ.N also climbed as the potentially split Congress was likely to shield the industry from sweeping reform. The NYSE Arca pharmaceutical index .DRG shot 4.66% higher.

(GRAPHIC: Trump and the stock market - )

The CBOE volatility index .VIX, a gauge for short-term volatility, hit a two-week low after spiking to a four-month high in the run-up to the election.

Despite the rally in stocks, the potential for political uncertainty also sent investors to U.S. Treasuries, sparking the biggest one-day drop in 10- and 30-year bond yields since June. Shares of U.S. banks .SPXBK, which typically track Treasury yields, slumped.

(GRAPHIC: S&P 500 in first terms: Trump vs Obama - )

The S&P 500 posted 49 new 52-week highs and no new lows; the Nasdaq Composite recorded 112 new highs and 28 new lows.

Volume on U.S. exchanges was 10.39 billion shares, compared with the 9.09 billion average for the full session over the last 20 trading days.

Reporting by Chuck Mikolajczak; Editing by David Gregorio