Last week saw one of the largest increases in volatility since the financial crisis as equities tumbled. Even so, many market pundits say not to worry because the U.S. economy is still expanding at a strong pace. That may be true now, but when volatility exploded in the past the economy usually took a hit.
Volatility shocks in 1998, 2008 and 2011 foreshadowed slower growth, or even a contraction, about one to two quarters later. Rising volatility in financial markets can affect confidence, causing companies to delay expansion or other plans and for consumers to cut back on spending. After all, it's hard to know whether the funding you need to pay for such things will be available and at what cost if markets are going haywire.