There's an old saying on Wall Street: "It's not the news that matters, it's the market's reaction to the news that matters."

Ultimately, stock and Treasury markets had a mainly negative reaction to this week's slate of major news events, notably Tuesday's

Fed

meeting and Friday's stronger-than-expected employment report. Still, major equity averages held up pretty well despite Alan Greenspan's warning about the budget deficit, $40-per-barrel oil and the Iraqi prisoner of war scandal.

For the week, the

Dow Jones Industrial Average

fell 1.1%, the

S&P 500

shed 0.8% and the

Nasdaq Composite

dipped 0.1%. Pronounced weakness Thursday and an afternoon selloff Friday reversed the averages' early-week gains.

On Friday, the Dow fell 1.2% to 10,117.34, the S&P 500 shed 1.4% to 1098.70 and the Comp shed 1% to 1917.96. Meanwhile, the price of the 10-year Treasury note fell 1 9/32 to 94 1/32, its yield rising to 4.77%, its highest level since July 2002; for the week, the yield on the benchmark note rose 26 basis points.

The declines followed a much stronger-than-expected April employment report, which aggravated lingering concerns about the timing and magnitude of future Fed rate hikes.

On Tuesday, of course, the Federal Open Market Committee left rates unchanged, but altered its

rhetoric from a "patient" stance on tightening previously to a belief "policy accommodation can be removed at a pace that is likely to be measured."

Fighting the Fed

Reactions to the FOMC statement reflected the market's struggle with assessing the prospect of higher rates, as well as frustration with the Fed itself.

Although the historically low fed funds rate has been a boon to financial assets, some traders expressed frustration the Fed didn't take action this week. Such a move would have surprised financial markets, but the concern is the Fed has fallen behind the curve in reacting to evidence of inflationary pressures. Meanwhile, skeptics wonder if the Fed "knows something" about the recovery and is thus afraid to tighten, or whether central bankers are simply clueless about inflation's re-emergence.

A more sophisticated view is that the Fed is willing to risk spurring higher inflation down the road vs. the possibility of "torpedoing consumer spending, real estate assets, mortgage and fixed-income portfolios, and the federal budget," as Howard Simons observed in

RealMoney.com's

Columnist Conversation. "After all, the interest on the national debt will rise along with interest rates." (That's a particularly acute issue given Greenspan's comments this week about the budget deficit threatening the economy's long-term stability.)

Other observers suggested the real concern isn't the Fed's wisdom, or lack thereof.

"Whether or not the Fed is behind the curve is almost moot," said Brian Belski, fundamental market strategist at Piper Jaffray. "We believe the market will rally when the Fed tightens. It's definitely an event hovering over the market

now. People are saying 'We don't know what's going on

and don't want to commit money no matter how good the fundamentals are.'"

On the surface, the fundamentals looked pretty good this week, as evinced by earnings from

Tyco

(TYC)

, the buyout offer for

Charter One Financial

(CF) - Get Report

and the latest string of economic data. Improvement was highlighted by Friday's employment report, but also by strong reports on construction spending, factory orders, first-quarter productivity and the ISM indices.

Then again, the nagging truth is markets almost never top when fundamentals are bad.

"Why are things supposed to get that much better after a fairly fun run?" wondered Tobias Levkovich, U.S. equity market strategist at Citigroup Smith Barney.

Admittedly "more cautious than most," Levkovich suggested "three things that have carried you since October 2002 are going to be less positive" going forward. He cited sentiment, which went from "depressed" in October 2002 to "euphoric" in January and is thus no longer bullish from a contrarian view; a deceleration in the trend of earnings growth; and a less-positive liquidity backdrop once the Fed starts moving.

While more optimistic overall, Belski conceded worries about a slowing of the previously rapid pace of earnings growth and higher interest rates are currently weighing on shares. In addition, he noted the bond market's first-quarter rally produced an "I gotta buy financials" reaction among portfolio managers.

With that Treasury rally proving to be a "head fake," there's now a "reallocation of capital going on," he said, which is particularly hurting the S&P 500 because of the financial sector's heavy index weighting.

"Judging by my conversations, mutual fund guys are sitting on lots of cash while hedge fund guys are bearish and frothing," Belski said, suggesting the mutual fund capital will be deployed and the market will rally -- once uncertainty over the timing of Fed rate hikes is finally removed.

Softening of Hard Assets

Crude rallied this week -- hitting $40 per barrel intraday Friday for the first time since the first Gulf War -- despite renewed strength in the dollar. The greenback, in turn, was buoyed by the stronger-than-expected economic data and the widening yield differential between the 1% fed funds rate and other major global lending rates; the Bank of England raised its key lending rate to 4.25% this week. However, the dollar's strength weighed on other commodities, most notably gold, which fell 2.4% this week to $379.10 per ounce Friday.

In addition to monetary issues and concerns about potential slowing in China, commodity prices have been hurt by rising energy costs, which is "the most important cost for commodity producers," noted one commodity-focused hedge fund manager, who requested anonymity. "If crude goes up, your end costs go up; it's the same for every commodity."

However, rising crude prices didn't aid related stocks, which have been on a big run in recent months. For the week, the Philadelphia Stock Exchange Oil Service Index fell 4.9%, falling sharply Wednesday after a downgrade by Bank of America Securities oilfield service analyst Jim Wicklund.

"There's too many people long crude," said the source, who manages more than $1 billion and remains fundamentally positive on commodities as an asset class. "With people worried about the dollar and pension money getting long

commodities, it does create a period of marginally higher commodity prices."

Finally, I'll be back on John Batchelor's ABC Radio Network show to discuss these and related issues Friday night/Saturday morning, around 9:30 p.m. PST/12:30 a.m. EDT. Check the

ABC Radio Web site for Webcast options.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

atask@thestreet.com.