We provide a powerful new predictor of the equity premium: Smoothed past overnight market returns strongly negatively forecast the quarterly close-to-close excess return on the market. Decomposing this predictability, our novel signal negatively forecasts both overnight and intraday components of close-to-close returns, while smoothed intraday returns positively forecast the overnight component. We interpret these patterns from a clientele perspective: Individual investor expectations and consumption growth strongly positively forecast overnight returns, while intermediary risk tolerance strongly negatively forecasts intraday returns. We show that the predictability we document is stronger in settings where overnight returns are more likely to reflect household sentiment.
