Beware Foreign Entanglements

A reduction in foreign buying of U.S. assets may continue to erode the trade deficit, but a weak dollar, or a "5% to 6% drop from here could grease the wheels of inflation" in the U.S., says Laidi.

More inflation could reignite rate-hike fears. For now, the Fed is keeping its monetary policy on "pause" in order to collect data and assess the housing market's decline and the impact of 17 consecutive interest rate hikes from mid-2004 through mid-2006.

But Fed speakers, including Chicago Fed President Michael Moskow, lately have emphasized the risk of inflation over concerns about slowing growth. The rhetoric has not yet caused markets to increase their inflation expectations, but investors seem increasingly frustrated and unsure about the direction of Fed policy.

As of Wednesday, the fed funds futures market seems to have thrown up its hands in frustration and prices in no movement in the fed funds rate until May. As recently as September, the fed funds futures market was pricing in a 50% chance of a rate cut in January. The market flipped the odds to favor a hike sooner rather than later.

For Thursday, the stock market was still digesting the Democratic win in the House and the Senate, while watching the price of oil climb back above $60 per barrel. Also, the University of Michigan survey showed a 1.4% drop in consumer sentiment in November after a 14% jump in the September/October period.

So while it pays to keep your eye on the trees in Washington, don't lose focus on the forest, or the rest of the world.

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