28 Feb 2024 2 min read

All quarters are equal, but some are more equal than others

By Christopher Jeffery

What do Nobel Prize-winning physicist Niels Bohr and baseball player Yogi Berra have in common? They’ve both been cited as the source of one of my favourite market-relevant quotes: "prediction is very difficult, especially if it’s about the future".


One of my investment bugbears is dressing up statements about the past as statements about the future. Forecasters are fond of pulling off this trick to make themselves seem profound.

Anyone with a passing acquaintance with macroeconomics can tell you that GDP is a ‘flow’ rather than a ‘stock’ concept. It captures total economic output within a given period, rather than the level at the end of that period. The same principle applies to corporate earnings: profits accrue, rather than being measured as a snapshot at one point in time.

However, forecasts and commentators sometimes fixate on annual growth rates. My problem with these calendar-year growth ‘forecasts’ is that they often tell us about the past rather than the future.

An excellent little paper from Statistics Canada offers a peak behind the curtain. The chart below is adapted from one of theirs. It shows how much each quarterly growth rate figure contributes to the calculation of the annual average.


In utterly counterintuitive fashion, the chart demonstrates that the third quarter of 2023 could be a more important determinant of 2024 growth than the fourth quarter of 2024. This highlights the substantial look-ahead bias inherent in any calendar-year forecasting.

Let’s run with an example here. Suppose that growth in every quarter of one year is +1%, but then a recession begins at the start of the next year, with output contracting by 0.25% in every subsequent quarter.

Output in this hypothetical economy has fallen by 1% during year two, but still expanded by 0.9% when measured on an annual average basis. This is a purposefully extreme example, but highlight the problem that calendar year ‘forecasts’ can often tell us more about the past than the future.


It doesn’t have to be this way. The Federal Reserve assiduously reports its expectations on a Q4-on-Q4 basis to avoid this bias. That best practice, sadly, does not extend to many other institutions. It’s not clear to me why any asset price should care about events that happened several quarters ago.

As George Orwell might have said[1], believing in the special power of calendar year forecasts is to believe that “all quarters are equal, but some are more equal than others”.


[1] If he were around today and interested in calendar-year averaging, rather than, in my opinion, being one of the greatest British novelists of the 20th century!

Christopher Jeffery

Head of Inflation and Rates Strategy

Chris works as a strategist within LGIM’s asset allocation team, focussing on discretionary fixed income and systematic risk premia strategies. He coordinates global rates and inflation strategy across LGIM’s asset allocation and fixed income capabilities. He joined LGIM in 2014 from BNP Paribas Investment Partners where he worked as a senior economist and strategist within the Multi-Asset Solutions group. Prior to that, he worked as an economist within monetary analysis at the Bank of England with a focus on the UK domestic economy. Chris graduated from University College, Oxford in 2001 with a first class degree in philosophy, politics and economics. He also holds an Msc in economics (research) from the London School of Economics and is a CFA charterholder.

Christopher Jeffery