"We are at an inflection point where, especially in the U.S., you'll start to see net inflows into equities," said Margaret Patel, senior portfolio manager at Wells Capital Management, which oversees $331 billion in assets. "The risk-taker will be rewarded this year."

In the week ended Wednesday, investors in U.S.-based funds poured $7.53 billion into stock mutual funds while exchange-traded funds investing in equities gained $10.78 billion in new cash, according to data from Thomson Reuters' Lipper service.

The inflow into U.S. stock mutual funds was the biggest since May 2001, and the $18.32 billion aggregate injection of money into equities funds was the biggest since mid-2008.

Separately, EPFR estimated that net inflows into global equity funds, including ETFs, in the same week hit $22.2 billion - the highest since September 2007 and the second highest since comparable data began in 1996.

Since the U.S. Congress agreed on tax hikes for the higher paid and averted the fiscal cliff on January 1, the S&P 500 stock index has climbed more than 3 percent. Last year, including dividends, it returned about 16 percent.

BROKERS LESS CONVINCED

An increasing appetite for U.S. equities is seen by major investors as a sign of rising confidence in the U.S. economy but also an indication of how few appealing alternatives there are given that money market funds yield virtually nothing and bond yields have sunk.

Some brokerage executives are less convinced than the fund managers that sentiment has changed as they point to continued distrust among retail investors about the stock market and whether the odds are stacked against them. Many of these mom-and-pop investors are also very concerned about the impact of further battles in Washington over the debt ceiling and spending cuts.

Still, the fund managers, particularly fixed-income investors, have warned that the gains in bond prices in recent years cannot go on forever. Junk bonds and corporate debt "which we felt good about a year ago... we now feel OK about," said Tad Rivelle, chief investment officer of fixed income at money manager TCW, where he helps oversee $135 billion in assets.

The average yield on U.S. high-yield "junk" debt fell below 6 percent this week for the first time ever, according to the Barclays Capital High Yield bond index.

Loomis Sayles & Co Vice-Chairman Dan Fuss, one of the best-known bond fund managers in the world with $182 billion in assets under management, has been raising warning flags that an extended period of rising interest rates is on the horizon and bond investors should adjust their portfolios while they can. "U.S. stocks are the place to be relative to U.S. bonds, in general," Fuss said.

On January 1, after weeks of uncertainty and fears that the U.S. was going to be hit by big spending cuts and tax rises that would have sent the economy over the "fiscal cliff" and probably into a recession, President Barack Obama and Congress reached a deal that averted the most draconian of the measures. Most of the tax increases only hit the highest income Americans and spending cuts were postponed.

Patel said "relief" that taxes on capital gains and dividends didn't go up across the board encouraged many investors to put money back to work in stock mutual funds.

Retail investors may have an "aha" moment if they contrast 2012's equity returns against much weaker returns from money-market, municipal bond and other fixed-income holdings, said Barbara Reinhard, chief investment strategist in the private banking Americas division of Credit Suisse AG.

"It may give them confidence that the equity market is the place to go back to for wealth creation and capital appreciation," she said. "You might see a rotation attempting to catch up on the misses of 2012."

BITTER MEMORIES

In a report sent to some Credit Suisse advisers and clients this week, however, Patel acknowledged that many investors are more affected by the memory of losses than the hope of gains.

"Investors in this group, still reeling from the devastating equity market action during the financial crisis, remain very reluctant to invest in equities," she wrote.

Equally concerning is a tendency to believe that the fixed-income returns that sustained investors during the crisis can continue despite a more stable economy and declining bond returns, some brokerage executives said.

"At some point you have to think they will see stocks have been awfully good and there is no other game in town, but I said that last year, too," lamented Arthur Grant, chief executive of Cadaret Grant & Co, a Syracuse, New York-based broker-dealer that employs about 1,000 contract brokers.

He said he doubted that the past week was the turning point. "It's hard for me to imagine that a single week would make that much of a difference in people's concerns," he said. "They're incredibly concerned about the debt limit and getting our fiscal affairs in order, and it's much stronger than fiscal cliff fears because they knew that one way or another their taxes were going up."

While the higher paid got hit with substantial tax increases, many people are facing a more modest increase - through higher payroll taxes.

Fractious debates in Washington over raising the U.S. government's debt ceiling and cutting government spending raise fears of a U.S. government debt default that could throw global markets into frenzy, brokerage executives said.

"There is a lot of money sitting around in risk-free assets that can go into equities, and I think retail investors are getting more bullish," said Fred Tomczyk, chief executive of TD Ameritrade Holding Corp, the second largest discount brokerage. "The risk is that they will screw up in Washington."

In the latest week to January 9, investors still sought riskier bonds and pumped $1.11 billion into high-yield "junk" bond funds, the most since mid-September, according to Lipper. Investors also gave $2.16 billion to investment-grade corporate bond funds, while taking $1.07 billion out of U.S. Treasury funds, the most since October of last year.

EPFR's latest weekly figures showed a net $7.39 billion inflow into emerging market equity funds and $3.4 billion into world equity funds. Inflows into U.S. equity funds, at $10.35 billion, were at a six-week high.

(With reporting by Sam Forgione; Editing by Martin Howell)

• A Permanent Economic Emergency