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As the worst-performing sector this year, financial stocks might make a tempting target for investors looking for value.
However, one market pro is advising caution against buying the group, which is one of only two S&P 500 sectors notching negative returns year to date.
Nick Colas, chief market strategist at Convergex, notes that not only have financials lagged the broader market in 2016, but they also remain the worst performer of the S&P's 10 sectors over the last 10 years, declining 29 percent during the period. Excluding real estate investment trusts, which have gained 28 percent on a price basis, the industry would be down 33 percent. Financials were off 1.4 percent year to date heading into Wednesday's trading.
Financials "face several powerful headwinds and a few crosscurrents to boot," Colas warned clients in a note that outlined six signs investors should heed before diving into the sector:
"The key takeaway from both this final point and the piece as a whole is that financials will likely remain a tough place to make outsized returns," Colas wrote. "Regulatory burdens are a piece of that, to be sure, and in the absence of a change in Washington that drag seems likely to continue."
The note mostly avoids the role the Fed will play with bank stocks. There's expectation that as the central bank normalizes rates, bank performance will follow. However, recent indicators are that the Fed is no hurry to raise rates, keeping bank returns in check.
"In the end, the resurrection of this group will have to come from one place, and one place alone: all those clever people who run the companies," Colas said. "There is an old saying on Wall Street that the most important assets of a bank go up and down in the elevator every day. Perhaps one day they will find the 'up" button again."