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How Extreme Temperatures Affect the Formation of Economic Sentiment and its Implications for Stock Returns

This paper investigates how individuals form beliefs about U.S. economic conditions (i.e., economic sentiment) and their implications for stock returns in a unified framework. We conjecture that individuals' psychological states impact the formation of economic sentiment, and we draw from research that finds local weather affects individuals' belief-formation process and asset prices to conduct our empirical analyses. Our analysis combines Gallup's U.S. Daily Poll, which provides daily data on the economic sentiment of a population-representative random sample of 1.5 million individuals, with daily weather conditions based on survey respondent location. We find that "extreme" temperatures (below 15 degrees and above 85 degrees Fahrenheit) decrease individuals' sentiment about the economy and that this effect relates to temperature-induced decreases in individuals' perceived life satisfaction. Moreover, these local temperature-induced life-satisfaction-driven decreases in economic sentiment relate to declines in the stock returns of local firms. The findings highlight how behavioral factors affect sentiment about economic activity, with implications for stock returns.