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US STOCKS-Stocks rally as Wall St cheers potential gridlock

(For a Reuters live blog on U.S., UK and European stock markets, click LIVE/ or type LIVE/ in a news window.)

* S&P healthcare index jumps to record high

* Banks among rare decliners in afternoon trading

* Investors want decisive result and path to stimulus (New throughout, updates prices, market activity and comments to mid-afternoon; new byline, adds NEW YORK dateline)

NEW YORK, Nov 4 (Reuters) - U.S. stocks surged on Wednesday as the race for the White House remained undecided and the likelihood of gridlock in Congress gave investors optimism that major policy changes would be hard 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.

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

“The divided congress means nothing major or extreme from a policy standpoint is likely going to happen anytime soon, be it increased taxes, more restrictive energy policy, more stimulus, things like that look like they got pulled right off the table,” said Shawn Cruz, Senior Market Strategist at TD Ameritrade in Jersey City, New Jersey.

The Dow Jones Industrial Average rose 605.68 points, or 2.2%, to 28,085.71, the S&P 500 gained 96.07 points, or 2.85%, to 3,465.23 and the Nasdaq Composite added 441.61 points, or 3.96%, to 11,602.18.

The S&P healthcare index jumped 5.20% to a record high, while the information technology sector rose 4.01%, as a divided Congress lowering the odds of higher antitrust scrutiny, capital gains taxes and a restoration of parts of the Affordable Care Act. The healthcare index was on track for its biggest daily percentage gain in about five months.

Still, with the rising possibility of a contested presidential election, investors have said they favor a definitive, swift resolution that would clear the way for a deal on a stimulus package to help revive the economy.

The NYSE FANG+TM Index, which includes the core FAANG stocks such as Apple and Amazon jumped 4.18%.

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

Big Pharma Pfizer, Merck & Co and Johnson & Johnson also jumped as the potential split Congress was likely to shield the industry from sweeping reform. The NYSE Arca pharmaceutical index shot up 5.52%.

The CBOE volatility index, a gauge for short-term volatility, slipped to 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, which typically track Treasury yields, slumped 2.58%.

Advancing issues outnumbered declining ones on the NYSE by a 1.70-to-1 ratio; on Nasdaq, a 1.34-to-1 ratio favored advancers.

The S&P 500 posted 46 new 52-week highs and no new lows; the Nasdaq Composite recorded 102 new highs and 20 new lows.

Reporting by Chuck Mikolajczak

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