Stocks Rise as Dems Gain, Rumsfeld Resigns

The Dow hit a new all-time closing high as market players eyed potential Washington gridlock and the defense secretary's ouster

by Marc Hogan

Stocks finished higher Wednesday, recovering from early losses as Defense Secretary Donald Rumsfeld stepped down and the Democrats came within one yet undecided race of controlling both the House of Representatives and the Senate. The Dow hit a new all-time closing high, while oil prices rebounded.

On Wednesday, the Dow Jones industrial average rose 19.77 points, or 0.16%, to 12,176.54, topping its previous record close of 12,167.02. The broader Standard & Poor's 500 index added 2.88 points, or 0.21%, to 1,385.72. The tech-heavy Nasdaq composite gained 9.06 points, or 0.38%, to 2,384.94, helped by Apple (AAPL) and Yahoo! (YHOO).

NYSE breadth was positive, with 21 issues advancing for every 12 declining. Nasdaq breadth was 18-12 positive.

The shift in House control from Republicans to Democrats was in focus Wednesday. Analysts widely projected Democrats to take over the House, but a Senate victory was less expected.

Democrats also defeated at least five Republican senators, while a Senate race in Virginia was still too close to call. Another tightly contested race was decided Wednesday morning when Montana Democrat Jon Tester was projected to defeat Republican Sen. Conrad Burns.

In a press conference, President Bush announced Rumsfeld was resigning. Bush named Robert Gates, a former director of the Central Intelligence Agency, as Rumsfeld's replacement.

At the outset, investors were consolidating gains, some analysts say. "Coming down to the wire like this [in the Senate] is not the great market mover that you might think it is," says Art Hogan, chief market analyst at Jefferies & Co. "We think there are a lot of things that are positive about gridlock. That thesis is still intact."

The Democratic leadership, headed by likely Speaker of the House Nancy Pelosi (D-Calif.), may consider its strong electoral showing a mandate to pursue its policy priorities, other analysts note. "The question is whether the President is getting the blotter out for his veto pen," says David Rosenberg, North American economist at Merrill Lynch, in a research report. "Pelosi's 'Six in '06' platform called for Congress to quickly raise the minimum wage, cut interest rates on student loans, roll back subsidies to oil companies, boost spending in stem-cell research and strengthen homeland security."

The balance may have shifted on the issue of free trade, as well, some analysts say. "While I am in the camp of those who believe that the stalemate version of gridlock is mostly bullish for the economy and for the stock market, I am concerned about rising protectionism," says Ed Yardeni, chief investment strategist at Oak Associates. "Congress isn't as likely to give the White House the 'fast track' authority needed to negotiate multilateral and bilateral free trade agreements as in the past."

On the company side, Merck (MRK) was lower as the drugmaker revealed that liabilities from four tax disputes could total $5.58 billion. Pharmaceuticals and managed care were among the session's worst-performing industires on fears of tough Democratic legislation, says S&P.

Altria (MO) was higher after voters in Alaska defeated a state measure that would tax cigarettes. Fellow Dow component Exxon Mobil (XOM) was also up after California voters rejected a proposed oil tax.

Fast-food giant McDonald's (MCD) was higher after posting a 5.5% increase in October same-store sales.

Software maker Novell (