It’s Not Just Mamdani. Big Brother Is Coming for the Stock Market.

New York City Mayor-Elect Zohran Mamdani on election night in Brooklyn. (Adam Gray / Bloomberg)

Capitalism has become a losing position in recent elections—and that’s bad news for investors.

As a Brooklyn resident, I experienced this firsthand with the election of Zohran Mamdani, a member of the Democratic Socialists of America, as mayor of the city that was once the beating heart of American business. Mamdani won on a plan to offer free bus rides, freeze rents, increase taxes on the wealthy and corporations, and create city-owned grocery stores. Each of these proposals attempts to address real problems but are either the result of magical thinking or will do more harm than good.

Most of what Mamdani wants to do is outside the powers of the mayor of New York. Jefferies analyst Aniket Shah notes that Mamdani has the ability to ramp up enforcement of the housing code through city agencies and can electrify New York’s government vehicles by his authority to manage city operations. He won’t, however, be able to freeze rents without the approval of an independent board, and has no say over buses, which are managed by the Metropolitan Transportation Authority. Taxes and the minimum wage are set by the state. Even opening city-run grocery stores would take City Council approval, which seems unlikely.

Mamdani’s election has had a market impact, even if it’s limited to a small swath of companies. Shares of SL Green Realty and Vornado Realty Trust, real estate investment trusts focused on New York office space, have dropped 21% and 10%, respectively, since Mamdani won the Democratic primary over concerns that companies could decide to leave the city as a result of the new mayor’s policies, as the S&P 500 rose 12%. Banks with exposure to rent-controlled apartments have been pressured as well. Flagstar Financial has fallen 4.3% over the same period, and Dime Community Bancshares has declined 2.7%, even as the State Street SPDR S&P Regional Banking exchange-traded fund has gained 4%.

Though the market impact of Mamdani’s win is limited, the signal it sends isn’t. Americans are increasingly comfortable voting for heavy-handed government, whether the socialist rhetoric coming from the left or the mercantilism emanating from President Donald Trump on the right. It’s an irony not lost on Rosenberg Research founder David Rosenberg. “A free-enterprise country elects a president who embraces protectionism, economic nationalism, and state intervention,” he writes. “And then New York City, the world’s financial hub and bastion of Gordon Gekko capitalism, elects a self-avowed socialist for mayor.”

I’m no free-market libertarian. I’m a firm believer that government should set clear rules that are enforced equally—and may the best companies win. But having government pick winners and losers ultimately means that companies will try to impress the politicians.

So it’s with some chagrin that I watch Trump get involved at such a micro level with various American companies. The U.S. converted government grants into an equity stake in Intel; a “golden share” in U.S. Steel was the price for allowing its merger with Japan’s Nippon Steel to go through; and Washington agreed to take a 15% cut of all chip revenue from China by Nvidia and Advanced Micro Devices to allow those sales to proceed.

Some deals make strategic sense. The U.S. does need to move chip manufacturing back home, though it remains to be seen if an investment in Intel is the way to do it. Better yet, the government’s deal with rare-earth miner MP Materials seems like a quick and easy way to boost production of these essential products in a market that China has dominated by its willingness not to make a profit on these goods.

The problem is that investors will start looking not for good companies with solid fundamentals that will allocate capital efficiently, but for the stocks that are most likely to be on the receiving end of government largess. After the MP deal, shares of companies with a connection to rare earths, including USA Rare Earth and Ramaco Resources, popped even though they, unlike MP, are far from being able to mine the materials, process them, and then turn them into magnets.

It might not be a big deal when the companies have market values under $2 billion. It becomes a bigger one when everyone goes looking for a handout. A kerfuffle broke out after OpenAI’s Sarah Friar suggested at The Wall Street Journal’s Tech Live conference that the U.S. government should provide loan guarantees to help build out AI infrastructure.

Though the company walked back the statement, Wall Street wasn’t thrilled by the idea that the government would provide the artificial-intelligence giant help in meeting its financial commitments or the possibility that it could actually get the assistance. “The U.S. administration has been more willing to take ownership stakes in other companies, and if the equity sweetener is generous enough, they may take the bait on this one as well,” writes D.A. Davidson analyst Gil Luria.

Despite the S&P 500’s 1.6% decline this past week, investors have, for the most part, ignored the risks of a more heavy-handed government. They shouldn’t, if only because we’ve seen what happens when countries—with governments on the right and the left—use their companies as tools of policy.

Petrobras, for instance, has been a tool of Brazil’s leaders on both ends of the spectrum, and has suffered because of it. Its stock has returned 6.2% annualized over the past 20 years, three points less than the 9.2% return offered by Chevron. In China, where companies operate at the whims of the Communist Party, Alibaba Group has returned 8.7% annualized over the past two decades, to Amazon.com’s 27%, while the iShares MSCI China ETF has returned just 4% annualized, less than a third of the S&P 500’s 13% over the same period. And the less said about Europe and the impact of its stifling regulation, the better.

There’s a reason the U.S. has outperformed everyone else over the long term. We mess with it at our own risk.

Write to Ben Levisohn at Ben.Levisohn@barrons.com