Nov. 8 (Bloomberg) -- U.S. stocks rallied for a third day, sending the Dow Jones Industrial Average to a record, as investors bet on companies that would benefit from a Democrat- controlled Congress.

Exxon Mobil Corp., the world's largest oil company, led the Dow's advance as rising crude prices lifted energy producers. Archer-Daniels-Midland Co., the biggest producer of ethanol, had its steepest gain in six months on speculation Democrats may expand subsidies for the fuel.

Geron Corp. and other stem-cell researchers climbed on the prospect that yesterday's Democratic victories will lead to increased funding. The defeat of a proposed cigarette tax in California boosted Altria Group Inc. and Reynolds American Inc., the two largest U.S. tobacco companies.

``Investors are focused on sectors that will be helped and hurt by the elections,'' said Frederic Dickson, chief market strategist at D.A. Davidson & Co., which manages $17 billion in Great Falls, Montana. ``We'll see more fiscal responsibility in Washington and an opportunity to achieve some bipartisanship.''

The Dow average climbed 19.77, or 0.2 percent, to 12,176.54, eclipsing the closing high of 12,163.66 on Oct. 26. The Standard & Poor's 500 Index added 2.88, or 0.2 percent, to 1385.72.

The Nasdaq Composite Index rose 9.06, or 0.4 percent, to 2384.94, a level not seen since Feb. 16, 2001. Microsoft Corp. aided the rally after saying it will release its new Windows Vista software to businesses this month.

Control

Capitalizing on furor over the war in Iraq and President George W. Bush's declining popularity, Democrats picked up at least 27 House seats, ensuring control of the 435-seat chamber in January. They also have so far wrested five Senate seats from Republicans, shy of the six needed for a majority.

Health-care shares declined, led by Merck & Co. and Humana Inc., on concern that Democrats may push for an agenda that cuts government payments for drugs and medical insurance. Defense companies dropped as Democrats may reduce military spending and Secretary of Defense Donald Rumsfeld resigned.

Some investors said a divided government would prevent either party from controlling the economic agenda, clearing the way for corporate earnings and economic data to influence shares.

``A stalemate between the president and the Congress is usually a fairly bullish thing,'' said Barton Biggs, who helps manage $1.6 billion at Traxis Partners LLC in New York. ``The fundamentals are what's going to drive this market, not the political events that just happened.''

Energy Shares

Energy shares climbed 1.8 percent for the best performance among 10 industry groups in the S&P 500. The group also gained after voters in California, the most populous state, rejected a tax on oil to spur the development and adoption of clean energy technologies.

Exxon rose $1.60 to a record $74.13. Chevron Corp., the lead contributor to the $95 million campaign to defeat the tax, added 60 cents to $69.51.

Crude oil for December delivery climbed 1.5 percent to $59.83 a barrel in New York after a government report showed that U.S. diesel inventories fell for a fourth week.

Archer Daniels jumped $2.20 to $35.73 amid speculation that Democrats may boost demand for ethanol, a fuel made mostly from corn. The 6.6 percent increase was the biggest in the S&P 500 and the stock's best advance since May 2.

Stem-cell companies climbed as Democrats support funding for such research. Geron, the developer of cancer treatments based on an enzyme that may inhibit cell growth, surged 28 cents to $8.66. StemCells Inc. soared 32 cents to $3.39. Advanced Cell Technology Inc. rose 11 cents to 92 cents.

Cigarette Tax

Tobacco shares advanced after California voters rejected a ballot measure that would have more than quadrupled the cigarette tax to fund health-care services. Altria, the parent of Philip Morris, gained $1.12 to $81.45. Reynolds, which makes Camel and Kool cigarettes, increased $1.13 to $64.53.

Microsoft rose 3 cents to $28.98. The software maker, whose operating system runs almost 95 percent of the world's personal computers, said it finished its new Windows Vista in time to release it to businesses this month and consumers in January.

Two stocks gained for every one that dropped on the New York Stock Exchange. Some 1.70 billion shares changed hands on the Big Board, 11 percent more than the three-month daily average.

Drugmakers, along with a gauge of health-care equipment and services companies, were the biggest drags on the S&P 500 among its two dozen industry groups. The measures fell 1.5 percent and 1.7 percent, respectively, on concern a Democrat-led Congress may champion curbing Medicare drug prices.

Merck

Merck, the nation's fourth-biggest drugmaker, retreated $1.56 to $44.34 after saying it may have to pay $3.8 billion to the Internal Revenue Service in back taxes. The amount is about $1.5 billion more than Merck previously reported.

Pfizer Inc. fell 43 cents to $26.62. Humana, the second- biggest provider of Medicare drug benefits, lost $3.46 to $55.19.

``There is a perception that the Democrats would be more proactive in controlling drug prices and make available to senior citizens cheaper drugs from Canada,'' said Eric Thorne, who helps oversee $2.3 billion at Bryn Mawr Trust Co. in Bryn Mawr, Pennsylvania. ``It's a good idea to be a little bit light in the health-care sector.''

Johnson & Johnson dropped 72 cents to $67.99 after its Janssen unit received a subpoena from the California attorney general over sales and marketing of Risperdal, a schizophrenia drug. The subpoena was issued in September, J&J said today in a regulatory filing. The company said it is responding.

Hospira

Hospira Inc. tumbled $4.50, or 12 percent, to $33.30 for the steepest decline in the S&P 500. The hospital supplier spun off from Abbott Laboratories in 2004 reported a 6.5 percent drop in third-quarter earnings on lower sales of injectable drugs and infusion pumps.

UnitedHealth Group Inc. slumped $1.57 to $48. The largest U.S. medical insurance company said departing Chief Executive Officer William McGuire and his designated successor agreed to have stock options reset. The insurer said financial statements from 1994 through September this year are no longer reliable as they may not reflect the costs of stock-based compensation.

Among other industries affected by the elections, defense companies dropped. Defense Secretary Rumsfeld is stepping down and will be replaced by former CIA Director Robert M. Gates, President George W. Bush said today.

Lockheed Martin Corp., the world's largest defense company, fell $1.04 to $86.45. General Dynamics Corp., the biggest maker of armored vehicles for the U.S. military, slid $1.51 to $70.49.

Mortgage companies advanced because Democrats have opposed stricter regulation of them. Fannie Mae, the largest U.S. mortgage finance company, advanced $1.75 to $61.65. Smaller competitor Freddie Mac added $1.37 to $71.23.

Spiders, Futures

S&P 500 shares, called Spiders, gained 30 cents to $138.91. Nasdaq-100 tracking shares, known by their QQQQ symbol, added 20 cents to $43.03.

S&P 500 futures expiring in December advanced 2.60 to 1391.60 on the Chicago Mercantile Exchange. Nasdaq-100 Index futures rose 10 to 1761.75.

The Russell 2000 Index, a benchmark for companies with a median market value of $634 million, increased 0.7 percent to 769.84. The Dow Jones Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, added 0.3 percent to 13,876.54. Based on the advance, the value of stocks rose by $51.5 billion.

Advanced Cell Technology Inc. (ACTC US)
Altria Group Inc. (MO US)
Archer-Daniels-Midland Co. (ADM US)
Chevron Corp. (CVX US)
Exxon Mobil Corp. (XOM US)
Fannie Mae (FNM US)
Freddie Mac (FRE US)
General Dynamics Corp. (GD US)
Geron Corp. (GERN US)
Hospira Inc. (HSP US)
Humana Inc. (HUM US)
Johnson & Johnson (JNJ US)
Lockheed Martin Corp. (LMT US)
Merck & Co. (MRK US)
Microsoft Corp. (MSFT US)
Pfizer Inc. (PFE US)
Reynolds American Inc. (RAI US)
StemCells Inc. (STEM US)
UnitedHealth Group Inc. (UNH US)

To contact the reporter on this story: Allen Wan in New York at awan3@bloomberg.net.

Last Updated: November 8, 2006 17:17 EST