Uncle Sam is outperforming the S&P 500

By John Towfighi, CNN

(CNN) — The Trump administration is investing in publicly traded companies — and it’s sending stocks soaring higher.

Under President Donald Trump, the US government has taken equity stakes in companies including Intel (INTC), MP Materials (MP), Lithium Americas (LAC) and Trilogy Metals (TMQ). Investing in public companies is an unusual move that has sparked debate on Wall Street and Capitol Hill about whether the government should be interfering in markets.

Proponents say the equity stakes are a strategic move to support companies in industries that are critical to national security, such as rare earths mining and the production of semiconductor chips. Critics, meanwhile, say it’s a heavy-handed use of government influence that is un-American and exposes taxpayers to unnecessary risk.

So far, the government’s portfolio is outperforming the S&P 500. Intel shares are up 77% this year. MP Materials shares have soared 276%. Lithium Americas and Trilogy Metals shares are up 50% and 204%, respectively. The benchmark S&P 500 is up 14.5% this year.

“Markets seem to be understanding these deals as the federal government signaling it will continue to support these companies,” said Joel Dodge, director of industrial policy and economic security at the Vanderbilt Policy Accelerator.

Which companies is the US investing in?

MP Materials is a rare-earths mining company. The company on July 10 announced the Department of Defense (now the Department of War) would purchase $400 million of the company’s stock, giving it a 15% equity stake and making it the company’s largest shareholder.

Intel, the beleaguered chipmaker, announced on August 22 that the US government would invest $8.9 billion in the company, resulting in a 9.9% equity stake. On October 1, the Energy Department announced it would take a 5% equity stake in Lithium Americas, a lithium production company.

Trilogy Metals, a mining company that is developing an enormous mining project in Alaska, announced on October 6 that the US government would invest in the company. The Department of War took a 10% equity stake in Trilogy Metals.

The Commerce Department announced on November 3 that it would take a $50 million stake in Vulcan Elements, a private rare earths start-up. The government also has a “golden share” in US Steel as part of a national security agreement with Nippon Steel, which acquired the company in June.

Why is the government doing this?

The Trump administration’s actions are meant to address trade tensions with China, including bolstering supply chains of critical materials like chips and rare-earth minerals.

Rare earths in particular have become a sticking point in the US-China trade war. The minerals are used in everyday items like mobile phones as well as highly sensitive industries like defense, aerospace and the military.

China accounts for roughly 70% of global rare-earth elements mining output, 90% of rare earths refining output and over 90% of rare-earth magnet production, according to ING, a Dutch bank.

‘Self-sufficiency, allied resilience and national industrial champions are no longer optional,” James Litinsky, chief executive at MP Materials, said on the company’s earnings call on November 6. “They are the front lines of security.”

White House spokesperson Kush Desai said in a statement that “the Trump administration is committed to using every tool at our disposal to safeguard America’s national and economic security.”

There is precedent for the government to take stakes in companies to bail them out during a crisis. In the aftermath of the 2008 financial crisis, the government took stakes in companies including General Motors, Chrysler and AIG, then turned a small total profit when it exited those stakes by 2015.

But the government taking stock in companies outside of emergency situations is rare. Experts say it falls within a legal gray area.

“It is a real break from past attitudes toward government ownership, particularly for Republicans,” Alan Auerbach, a professor of economics at UC Berkeley, said in an email.

What are some of the concerns?

Skeptics say this kind of government intervention goes against free market values — and raises the risks of big losses for taxpayers. It’s also uncertain that an equity stake can produce stronger supply chains.

“There is the risk of failure. Not all investments work out,” said Sam Stovall, chief investment strategist at CFRA Research. “You’re going to find people who are questioning, ‘Why are we doing this? We don’t need to risk our tax dollars.’”

Scott Ladner, CIO at Horizon Investments, said he was skeptical about the decision to take stakes in companies. The government historically has been poor at picking winners, he said, and it could divert money away from other, more compelling companies that are not in the government’s purview.

“I just don’t like the precedent that it sets going forward,” Ladner said. “These individual ones might end up working fine, but the precedent and the power that it gives to the government 10, 15, 20 years from now — I don’t love that precedent.”

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