Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Yikes! Here's another reason to fear US stocks

Trader on the floor of the New York Stock Exchange.
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Deep-pocketed investors believe U.S. stocks will be the best place to put money this year. So far, they've been wrong.

In fact, the domestic market has underperformed most other global indexes, particularly those in Europe and Asia, as the U.S. Federal Reserve gets set to tighten monetary policy while its global counterparts are opening the spigots.

The is up just 1 percent in 2015 while the Dow Jones industrial average has gained 0.4 percent and the tech index is up 1.9 percent, as of Thursday midday trade.

Other indexes around the globe, however, have posted much stronger gains. In Asia, Japan's Nikkei 225 is up 3 percent; Hong Kong's has risen 3.5 percent; and stocks in India are up about 5 percent. European equities, boosted by the European Central Bank's commitment to U.S.-style quantitative easing, are up even more. Germany's DAX has jumped 11.6 percent, Italy's main stock index is up 10.7 percent and the U.K.'s FTSE 100 has climbed nearly 4 percent.

Still, investors responding to a recent survey by Legg Mason say the U.S. is the place to be.

Fully 85 percent of the 458 respondents that Legg Mason called "affluent U.S. investors" believe that the U.S. markets "offer the best opportunities over the next 12 months" compared to other global options. That's up from the 74 percent who predicted—correctly—that the U.S. would be the best market in 2014. In the aggregate, portfolios remain tilted to equities and virtually unchanged over the past few years.

Where the 1% are putting their money

Asset class 2015 2014 2013
Fixed income16%20%19%
Other (real estate, non-traditional, gold/metals)21%17%17%

Source: Legg Mason Global Investor Survey

The surge in sentiment, though, raises concerns that U.S. investors are becoming overconfident.

"This year, we're seeing even more investors expressing confidence in the U.S. equity markets, and this is concerning," Matthew Schiffman, global head of marketing for Legg Mason, said in a statement.

"Overconfidence can lead to a degree of complacency that could prevent investors from paying close attention to their overall financial plan and how they have allocated their assets as their own needs change," he said. "Investors have not changed their asset allocation since we started measuring investor sentiment three years ago, which could be another sign of complacency creep."

Sentiment among both retail and professional investors remains strongly bullish. The latest Investors Intelligence survey, which polls newsletter authors, found bulls at 52.5 percent and bears at just 15.2 percent. Retail investors have been just a bit less sanguine, with the most recent American Association of Individual Investors survey showing bulls at 40 percent and bears plunging to 20.3 percent.

Fund flows have painted a conflicted picture as well.

Tom Lee: Double-digit gains in S&P 500 this year
Tom Lee: Double-digit gains in S&P 500 this year

U.S. equity-based mutual funds have seen inflows of about $5.6 billion this year, while their exchange-traded fund counterparts have seen outflows of $22.1 billion, according to data tracking firm TrimTabs.

The biggest trend of note in the $2 trillion ETF space is how investors are running from the biggest fund, the $193 billion SPDR S&P 500, which tracks the index of the same name and has given up $23.6 billion year to date, more than the rest of the top 10 biggest funds combined in terms of outflows, according to The $38.1 billion Power Shares QQQ, which tracks the Nasdaq, is next worst with $2.8 billion in redemptions.

In fact, the top four ETFs, along with 5 of the top 6 and 7 of the top 10 that have seen the most outflows focus on domestic equities. Conversely, the fund that has seen the biggest inflows is the Wisdom Tree Europe Hedged Equity ETF, with $3.8 billion in new assets. Half the funds in the top 10 profit on fixed income, which has been a bright spot on the U.S. investment landscape.

Credit Suisse, in a note Thursday, called "rotation out of the U.S. and into Europe, as a key risk for U.S. equities in 2015." Indeed, the Legg Mason survey seemed to reflect at least a bit of that attitude, despite the fervor for domestic stocks, as 41 percent said they will "be more focused on international investments" than in 2014.