I agree with most of comments and suggestions so far, I'd say stress doesn't make the game more challenging, it makes it less fun. Stress is bad right now, these dwarves (and elves and humans) live in a violent, monstrous world and I think they should really reflect that emotionally. Medieval people thought gruesome violence like executions and burnings was entertaining, they should at least be tolerant of the sight of the corpse of strangers. Right now you can get 80 year old migrant axelords that will lose their minds from rain exposure, by the time you're that old you should know if you hate nature too much to travel. Migrants should show up expecting inclement weather, violence, tough living conditions, being separated from family, and not getting their favorite ingredients very often in meals. Someone prone to mental fracturing shouldn't be migrating around the world to be a pioneer, they should just stay in the mountain homes.
Just about anything I can think of has been said, but here are some suggestions that may help:
Dwarves could path around miasma, bad weather, known corpse piles or upsetting things. It makes sense that an emotional creature would avoid upsetting things.
Allowing dwarves to craft and acquire things by their own choice would be great. I know some people would hate materials being used without permission, but I think it's more interesting. Maybe you could designate a workshop as open to the public and have a linked stockpile of permitted materials for crafting, then anyone with a need to craft can stop in on their free time.
Highlighting in some way trade caravan goods that fulfill some dwarves food preferences, because there is no way to know what would be wanted from the trade screen.
Clothing options that protect from the weather, like raincoats, waxed hoods, jackets or boots. Alternately I'd rather a dwarf refuse to go out in the rain than do it and devolve into insanity or violence.
I love the idea of them building shrines or collecting things in their rooms that make them happy, of their own accord.
Adaptation - all people adapt to their circumstances, I read recently that levels of life satisfaction seem fairly consistent across cultural circumstances, from third-world poverty to first world comparative wealth. Dwarves should adapt to what they have to deal with and balance their moods, but have strong reactions to things out of the norm. Like if you have a wealthy peaceful fort then everything goes to hell and their are corpses everywhere people should lose it. But if you're living in a haunted biome with skin and hair trying to kill everyone those emotional hits should be weaker every time (barring the emotionally unbalanced).
Related to adaptation, food/drink preferences could change from experience like other personality traits. If you have a lot of fish in a fort it's realistic that people would start to consider it a favorite food.
A simpler solution might be a stress / emotion slider so people can just decide how fragile they want the average sentient being.
Some way for corpses to disappear would be a huge help to the corpse stress too, I like the
scavenger -
suggestions people have posted. As a bonus it makes the wildlife more interesting.
___
Sorry for any redundancies, this thread is too long to read.