The foils for the stock market this week were many, but the damage was relatively minimal.

Whether traders focused on the carnage in the subprime mortgage market, a Bank of Japan rate hike, the

Federal Reserve

and inflation fears, or Iran missing its deadline to halt uranium enrichment, the result was just drama, drama, drama. Still, major averages remained supported by their long-term foundation of abundant liquidity.

After hitting an all-time high on Tuesday, the

Dow Jones Industrial Average

ended the week down 0.9% at 12,647.48. The Dow Jones Transportation Average marched to another all-time high on Wednesday, and ended the week up 1%. The

Nasdaq Composite

also ended the week on an up note, gaining 0.8% to close at 2515.10. And, the

S&P 500

ended the week down only 0.3% to close at 1451.19.

Along with a higher-than-expected core CPI, commodities rallied sharply this week. The combination brought investors back to the

"we have inflation" daisy petal, says Sam Stovall, chief investment strategist for Standard & Poor's. A variety of commodities indices like the Journal of Commerce Raw Industrial Commodity Price Index, the Goldman Sachs Commodity Index ex-energy and the CRB Raw Industrial Index, either reached or approached all-time highs.

Crude oil jumped 2.5% for the week, settling at $60.88 Friday, and gold jumped 2.3% to close at $688.30 per ounce.

At the intersection of the commodities rally and renewed inflation fears was Wednesday's news that core CPI rose 0.3% in January, ticking up to 2.7% year over year from 2.6% in December. Headline CPI rose 0.2%.

The inflation data came as a surprise to investors who had spent the bulk of the year adapting to the idea that the Fed would be on hold, and leaning toward becoming more dovish. Later Wednesday, investors found that the Fed's Open Market Committee had contemplated taking a more neutral stance at its January policy meeting, but ultimately decided against it.

With inflation now ticking up, commodities soaring and the subprime mortgage market imploding, the Fed's Goldilocks rhetoric seems out of date.

It's as if the Fed has two voices on each shoulder, one whispering: "You can't cut, there's too much liquidity and inflation is still above the comfort zone." The other whispers: "You can't hike, think about those poor subprime borrowers."

More apropos this week was Fed Vice Chairman Donald Kohn's words, warning of a liquidity crunch amid markets that are too complacent and spoiled by low volatility. "In such a world, it would be imprudent to rule out sharp movements in asset prices and deterioration in market liquidity that would test the resiliency of market infrastructure and financial institutions," said Kohn in a speech at the Exchequer Club in Washington, D.C.

Investors contemplating a liquidity crisis surely weren't worried about the Bank of Japan rate hike, which did nothing to derail the yen-carry trade. The focus was squarely on the subprime mortgage market, which experienced more pain.

HSBC Holdings

(HBC)

, which warned of problems in its subprime business earlier this month, was quite public about the swift departure of two top U.S. executives. Its shares fell 0.9% this week, while other smaller lenders like

NovaStar Financial

(NFI)

fell 50.1% after reporting a massive quarterly loss.

New Century Financial

(NEW) - Get Report

,

Accredited Home Lenders

(LEND) - Get Report

,

Countrywide Financial

(CFC)

and

Washington Mutual

(WM) - Get Report

fell anywhere from 2.9% to 20% this week.

While some traders may wring their hands about whether weakness in the subprime market and the concurrent correction in related derivatives markets will spill over to other financial assets, most aren't pulling risk off the table yet.

"It's about the old newspaper adage, 'If it bleeds, it leads,' " says Stovall. "Housing and the subprime mortgage market were the droplets of the week."

Many economists note that the subprime problems do not have a large impact on consumer spending. As Joe Brusuelas, IDEAglobal's chief economist, said in my

Weekly Economics Wrap for TheStreet.com TV Friday, the subprime market is marginal.

Notably, even with subprime's links to large banks like HSBC,

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

, and others, the PHLX/KBW Bank Sector Index hit an all-time high on Tuesday, and slid only 1.2% from that high. The index is down only 0.8% on the week.

The homebuilders suffered a bit more as the possible glut of foreclosures could continue to weigh on home sales.

Toll Brothers

(TOL) - Get Report

fell 4.5% after reporting dismal earnings. The Philadelphia Homebuilding Sector Index slid 2% on the week. Next week brings January's key reports on new- and existing-home sales.

But, surely, this week's commodities rally will steal some of this weekend's media coverage.

While commodities rallies smack of inflation problems, they also can signal growth in the global economy. Speculators are clearly involved in such sharp commodity-price jumps as the week's 7% gains in copper and gasoline, but investors could consider the materials sector a safe bet at this point, says Jeffrey Saut, chief investment strategist at Raymond James.

"You may get growth scares, but it is irrefutable that there are billions of new entrants to the 21st century, and as they come in, per capita incomes rise, and when that happens, people consume more stuff," says Jeffrey Saut, chief investment strategist at Raymond James.

Saut says his "cautious" investments in "stuff stocks" have provided him with huge returns this year. The S&P Materials Index has retuned 9.6% thus far, he notes, adding that milk distributor

American Dairy

(ADY)

, which has a subsidiary in China, is an example of a good global-growth oriented investment. The stock is up 9% this week and 15% year to date.

Investors such as Saut are betting that global growth remains strong, even in the face of central banks with a tightening bias. The Fed could well be back on the hawkish-talk patrol soon, but it's setbacks such as in the subprime market that keep their actions tame. Even as Goldilocks starts to fade with new dramas stealing the spotlight, the on-hold policy stance still seems most prudent.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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