• A number of different economic factors can cause volatility in the stock market.stock market analysis screenshot image by .shock from Fotolia.com
  
  Stock markets are often marked by periodic bouts of volatility, in which prices will rise and fall steeply and erratically. This volatility is often spurred by economic sources, which affects investor confidence in the listed companies, causing them to move their money into and out of stocks.
  
  

Inflation

• When prices rise and the value of a unit of currency declines, you have what is known as inflation. While a small amount of inflation is regarded as normal, fears that the rate of inflation is rising too fast can cause volatility in the stock market, as inflation's effect on the economy is uncertain and affects different companies in different ways. Companies will likely charge more for their products, but their expenses will rise as well.
  
  

Consumer Spending

• Consumer spending is the lifeblood of the economy. As consumers spend more, the economy generally improves; as consumers hold back, many companies suffer. For this reason, investors pay close attention to indexes of consumer spending. Indications of a fluctuation in consumer spending can send the economy either up or down. When the market receives contrasting signals--for example, improved consumer confidence combined with decreased spending--volatility can result.
  
  

Interest Rates

• Interest rates are measures of the price at which lenders are willing to make loans. Often, the rate is affected by the policies of a country's central bank. When interest rates are low, people save less money, as banks are willing to offer only small returns on their deposits. When rates rise, saving rises as well. The effects of fluctuations in the interest rate can be interpreted differently by different investors, causing volatility.
  
  

Foreign Markets

• The health of foreign economies, usually reflected in activities on their stock exchanges, can have a number of different effects on domestic markets. In some cases, investors will fear that crises affecting foreign markets will spread, causing domestic stock prices to plummet. In other cases, investors will shift money from foreign companies into U.S. companies, causing prices to rise. The interplay of these two reactions can cause volatility.
  
  

Bond Market Volatility

• The bond market and the stock market are closely linked. Many companies listed on the stock market have issued bonds on the bond market or, in the case of investment banks and other companies that control large financial portfolios, own many of the bonds. Volatility in the bond market, which can affect the price at which companies can loan money, can cause volatility in the stock market.