Summary of Key Points
Over the past year, investors who followed the Trump administration's investment in public companies have made a considerable profit. However, these stocks are now facing three major risks: the mid-term elections (where a Democratic victory could lead to investigations), legal lawsuits questioning the legitimacy of the government's investments, and the fragile nature of the stock price increases, which are based on political support rather than the companies' fundamental performance. These risks could reverse the previous gains, prompting investors to re-evaluate the prospects of these stocks.
1. Government Investments in Stocks: Short-Term Explosive Growth, but Most Gains Were Transient
The Trump administration adopted a new approach: using government funds to purchase shares in public companies and directly injecting capital into them. This caused a frenzy in the market, with everyone rushing to buy stocks "selected" by the government. On paper, it seemed like a good deal: Intel's stock price rose by 300%, MP Materials by 87%, and Trilogy Metals by 73%. However, most of these gains were short-lived:
- Trilogy Metals' stock price soared from $2 to over $10 within days of the government's investment but has now dropped back to around $3;
- MP Materials' stock price increased by 150% in five weeks but then fell by 27% a year later;
- Intel's stock price peaked in June and has since dropped by 37%, making it one of the worst-performing stocks in the S&P 500.
In essence, these price increases were driven by speculation. Once the initial excitement wore off, there was no longer enough demand to sustain the prices, and the gains were not supported by the companies' actual financial performance.
2. Mid-Term Elections: A Time Bomb
The mid-term elections pose the most immediate risk. Polls indicate that the Democrats could gain control of at least one chamber of Congress. If they do, they will initiate investigations. For example, Democratic Senator Elizabeth Warren has already questioned the legitimacy of Intel's government investment. If she becomes the chair of the Senate Banking Committee, she could subpoena company executives and government officials to testify and review documents. Experts say the Democrats will "seize every opportunity to target Trump," and such investigations could severely damage the companies' reputations and stock prices. Investors would naturally panic, leading to a drop in stock prices. Unlike previous government rescues of failing companies, this time the Democrats are actively selecting "winners," which could result in even more significant consequences for these companies.
3. Legal Litigation: A Warning Sign
The legal risk is even more significant. Some shareholders have sued Intel, arguing that the Chip Act does not authorize the government to use equity in exchange for subsidies and that Intel's board of directors failed to protect shareholder interests. If the court rules that the government does not have this authority, it could be a major problem for not only Intel but also other companies that have received government investments, such as IBM and GlobalFoundries. Investment managers point out that it was the government's investment that helped stabilize Intel's stock price. Without this support, they worry about what would happen to the stock price.
4. The Flaw in the Price Increase Logic
The fundamental issue is that these stock price increases are not based on the companies' actual merits but on political support. Experts argue that prices driven by political trends are inherently fragile. In the past, the government's intervention was aimed at saving companies on the brink of bankruptcy; now, it is a proactive effort to support selected companies, and this approach has not been fully tested, meaning it could fail at any time. Simply put, if the political landscape changes (e.g., a Democratic victory) or the law supports this practice no longer, the foundation for these stock prices would be lost, leading to a sharp drop.
Conclusion
This "feast of government-backed stock prices" may seem exciting, but it is fraught with political, legal, and market risks. As the mid-term elections approach, investors are calculating whether following the government's stock investments will continue to be profitable. The answer may not be optimistic.
(The entire text is explained in plain language to ensure that non-experts can easily understand the context and the risks involved.)