15Interestingly, this compares to a VIX level of 17.6 on January 1, 2011, implying thatperceptions of risk are now relatively similar to those observed at the beginning of2011 (see Graph 1).16As a reminder (see Table 1), the Duff & Phelps U.S.recommended ERP was also 5.5% at the beginning of 2011.11“Overall, sales [in December 2011] rose 3.4 percent at the 22 retailers tracked by the Thomson Reuterssame-store sales index, compared with the 3.3 percent analyst forecast.” Source: Reuters, January 5,2012. According to the U.S. Census Bureau, advance estimates of U.S. retail and food services sales forDecember 2011 increased 0.1% relative to November 2011 and 6.5% versus December of 2010. Source:12Total nonfarm payroll employment increased by 200,000 in December. Source: U.S. Bureau of LaborStatistics.13The 4-week average of initial jobless claims declined to 379,000 in mid-January 2012 from 418,000 inlate September 2011. Source: U.S. Department of Labor. Economists typically think of 400,000 as thethreshold above which the economy is contracting rather than expanding. See for example, Standard &Poor’s “Global Credit Portal – RatingsDirect – Economic Research: U.S. Economic Forecast: U.S. WeeklyFinancial Notes: Freaky Friday”, January 13, 201214The U.S. unemployment rate declined to 8.5% in December 2011 from 9.0% in September 2011. U.S.unemployment reached of high of 10.0% in October 2010 following the 2008−2009 Financial Crisis. Source: U.S. Department of Labor.15The Chicago Board Options Exchange (CBOE) Volatility Index® (VIX®) is a key measure of marketexpectations of near-term volatility conveyed by S&P 500 stock index option prices.16The VIX Index averaged 18.04 (daily) in the first six months of 2011. By January 13, 2012, the VIX Indexwas at 20.91.
Duff & Phelps | Client AlertJanuary 27, 20128Graph 1: Chicago Board Options Exchange (CBOE) “VIX” IndexJanuary 3, 2011 – January 13, 2012Source:S&P Capital IQDefault spreads can also be a useful indicator of markets’ perception of risk. Forexample, in the summer of 2011, corporate spreads began to widen, peaking at theend of September, reflecting the high volatility and level of uncertainty discussedearlier (see Graph 2). Since then, however, these spreads have narrowedsignificantly, down to4.28%by mid-January 2012. Furthermore, by mid-January,the spread in U.S. corporate yields of high-yield over investment grade bonds wasnot far from the level observed at the start of 2011 (3.51% at December 31,2010).1717Source of underlying data: Federal Reserve Bank of St. Louis. U.S. investment grade corporate bondsare represented by the BofA Merrill Lynch US Corporate Master Effective Yield series, and high yield U.S.corporate bonds are represented by the BofA Merrill Lynch US High Yield Master II Effective Yield series.0.010.020.030.040.050.060.0Jan-11Feb-11Mar-11Apr-11May-11Jun-11Jul-11Aug-11Sep-11Oct-11Nov-11Dec-11Jan-12VIX IndexVIX Index (daily avg.) forfirst6 months of 2011 (18.0)September 30, 201143.0August8,201148.0January 13,201220.9
Duff & Phelps | Client AlertJanuary 27, 20129Graph 2: Spread of U.S. High Yield Corporate Bond Yields over U.S. Investment GradeCorporate Bond YieldsJanuary 3, 2011 – January 13, 2012Source:FRED® Economic Data – Federal Reserve Bank of St. LouisWhile investors' perceptions and attitudes towards risk seemed to have reversed inthe last couple of months, significant risks still remain. In the words of a recent S&P