Two signals from this week that every investor should understand

This week produced two events that both deserve the attention of long-term investors: the summit between Trump and Xi Jinping in Beijing about a possible trade deal, and Moody's downgrade of the US credit rating. At first glance these look like sharply opposing signals — the first hopeful, the second worrying. But together they tell a story that hangs together more coherently than the initial market reactions suggest, and that story has direct relevance for how a thoughtful investor positions their portfolio.

The trade summit and what it means for investors

Markets responded on Monday with one of the strongest daily gains of the year to the news that Trump and Xi met in Beijing for a summit that could yield a first step toward trade normalisation. The S&P 500 rose more than 3 percent, the Nasdaq nearly 4.5 percent. The expectation is that both countries will reduce tariffs on around 30 billion dollars of non-sensitive goods — a modest but symbolically meaningful beginning of a de-escalation in the global trade tensions that have dominated for months.

For the investor, the question is not whether this news is good or bad, but what it says about the environment in which companies operate and which companies are best positioned to benefit from a normalisation. Industrial companies heavily dependent on international supply chains, commodity producers with global end-markets, and European exporters caught in the crossfire of the US-China trade war are the ones most directly helped by a de-escalation. Companies that have already restructured their supply chains and are less dependent on trans-Pacific trade flows watch the potential agreement from a greater distance.

But the deeper lesson for the investor is a different one. Monday's market rally illustrates again how quickly and powerfully markets react to news that reduces trade uncertainty. Investors who sold during the period of maximum fear and uncertainty have missed that gain. Investors who held on or added in the lows of April are now seeing the fruits of their patience. That pattern — fear as a moment to sell, recovery as a moment of reward — repeats itself again and again in the history of investing.

Moody's downgrades the US credit rating

Set against the optimism of the trade summit was a more uncomfortable item: Moody's downgraded the US credit rating from AAA to Aa1, the highest rating the major agencies assign. Standard and Poor's did so already in 2011, and Fitch followed in 2023. Moody's was the last of the three big agencies to keep the US at the top tier. That position is now over.

A credit rating is an independent assessment of the likelihood that a borrower will repay their debts. A downgrade means that the agency sees more risk in US government finances than before. The concrete trigger is the combination of a national debt of more than 36 trillion dollars, structurally rising deficits, and a political environment that makes it difficult to constrain spending in any structural way. Interest costs on US government debt are now one of the largest budget items — larger than defence in some years — and that amount continues to rise as existing debt is refinanced at higher rates.

What it means for investors

The immediate market reaction was limited: a short rise in bond yields and a mild weakening of the dollar, after which attention returned to Beijing. That is fair. The practical consequences for the day-to-day functioning of financial markets are limited in the short term. The dollar remains the global reserve currency. US Treasuries remain the most traded safe asset in the world. Institutional investors will not suddenly change their mandate because of a rating adjustment.

The long-term message, however, is more important than the short-term market reaction suggests. A downgrade by the last of the three big agencies is a public signal that the direction of US government finances is unsustainable without serious correction. For the investor with a long horizon, this strengthens the argument for genuine geographic diversification across multiple countries and currencies, rather than a portfolio that is predominantly concentrated in dollar assets. It also deserves attention as a risk factor for interest rates and the dollar over the medium term.

Two signals, one conclusion

Both events of this week point in the same direction, even if they do so in different ways. The trade summit confirms that geopolitical tensions can de-escalate, and that well-positioned companies in sectors such as commodities, industrials and European exports can benefit strongly from an improved trade environment. The Moody's downgrade confirms that concentration risk — in this case, an outsized exposure to the dollar and US Treasuries — carries real long-term risks.

The investor who takes both signals seriously builds a portfolio that is broadly diversified across geographies and sectors, with attention to the structural forces that will shape the economy in the decades ahead: the energy transition, digitalisation, and the reshuffling of global trade and financing flows. That investor is not dependent on a single country, a single currency, or a single investment theme. And that is precisely the position that, over the long term, is most resilient to the uncertainty that a week like this brings so sharply into focus.

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Disclaimer. This article is published by Lunar Asset Management N.V. for general informational and educational purposes only. It reflects the personal views of the author at the time of writing and does not constitute investment advice, a recommendation, an offer, or a solicitation to buy or sell any security or financial instrument. References to specific companies are illustrative and should not be interpreted as buy or sell recommendations. Investing involves risk, including the possible loss of principal. Past performance is not a reliable indicator of future results. Readers should consult a qualified financial advisor before making any investment decision based on their personal circumstances. Lunar Asset Management N.V. is supervised by the Centrale Bank van Curaçao en Sint Maarten (CBCS).