Abstract
If investors choose consumption and investment jointly to maximize expected utility, then any investor sentiment about stock returns should be reflected in consumption choices. I find that non-durable consumption moves in the same direction as investor sentiment contemporaneously. But 2-4 years later, as sentiment corrects, consumption moves opposite to prior sentiment. The results are consistent with sentiment representing a false perception of a change in permanent future stock wealth, which leads to counterproductive attempts at consumption smoothing in aggregate. Sentiment-influenced consumption choices increase consumption's volatility and co-variance with the stock market, while lowering mean consumption and wealth.
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