Extreme Local Temperatures Lower Expressed Sentiment About U.S. Economic Conditions With Implications For The Stock Returns Of Local Firms

Abstract

We draw from research that finds local weather conditions affect individuals' belief-formation process and asset prices to investigate whether "extreme" local temperatures impact individuals' beliefs about U.S. economic conditions (i.e., economic sentiment) and the stock returns of local firms. We combine Gallup's U.S. Daily Poll, which provides the daily-level economic sentiment of a population-representative random sample of 1.5 million individuals, with daily weather conditions based on survey respondent location. We document that extreme local temperatures decrease individuals' sentiment about the U.S. economy and that this decrease relates to declines in the stock returns of local firms. Further tests distinguish this extreme local temperature-sentiment effect from the effect of perceived life satisfaction on individuals' economic sentiment, suggesting that the potential effect of extreme temperatures on individuals' moods is not driving our results. We conclude that extreme local temperatures affect individuals' sentiment about economic activity beyond the potential effect of temperature on firm- or local-level economic variables, with implications for stock returns.

Keywords: Economic sentiment, Capital markets, Asset prices, Limited attention, Investor psychology, Climate

JEL Classification: G12, G14, G41, M41, D91, Q54