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Fed Tapering Bad for Bank Stocks: Bank of America

NEW YORK (TheStreet) -- Bank stocks tend to decline when the Federal Reserve removes economic stimulus, as many expect the central bank to do on Wednesday, according to a Bank of America Merrill Lynch report published Tuesday.

The S&P bank index has rallied an average of 36% compared with 27% for the S&P 500 following previous announcements of quantitative easing (QE), according to the report. But when the Fed ended QE1 and QE2, bank stocks fell an average of 19%, compared with a 9% drop for the broader market, Bank of America's analysts concluded.

The Fed has been buying $85 billion monthly in U.S. Treasury bonds and agency mortgage-backed securities as part of QE3. Many observers expect the Fed to announce it will scale back that program when the Federal Open Markets Committee meets Wednesday.

Still, citing uncertainty about what the Fed will do, Bank of America's analysts recommend investors focus on what they call "cheap defensives" -- bank stocks "that are cheap vs. peers on current P/E, that will re-rate if bank stocks continue to be strong, but are considered defensive enough to outperform in a volatile market."

These include JPMorgan Chase (JPM), PNC Financial (PNC), Huntington Bancshares (HBAN) and Citigroup (C).

The analysts noted that Citigroup "tends to be more volatile than the market," but, citing "the strong underpinnings of the US housing recovery," they argue "the long-term recovery thesis at [Citi] is still intact," and recommend "buying particularly on any weakness."

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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