Stocks could see an outsized rally later this year and into 2023 if markets follow election-cycle history, BofA says

• Markets typically rebound after a September slump, but stocks tend to rally even more in midterm-election years, Bank of America said.
• The month of October across all years is positive 59.6% of the time, with average returns of 0.50%.

Markets typically rebound after a September slump, but stocks tend rally more in midterm-election years, Bank of America said.

In a Friday research note, BofA analysts pointed out that the month of October across all years is positive 59.6% of the time, with average returns of 0.50%. The rest of the year is even better as November returns 0.83% and December yields 1.36%.

That seasonality strengthens during midterm election years, BofA said, with October in the green 65.2% of the time and returns 2.16% on average.

Midterm Novembers also outperform with a return of 2.03%, while Decembers return 1.19%, trailing the overall average Santa Clause rally of 1.36%.

What's more, the strategists wrote that stock market gains continue into the first half of the year that follows.

"The SPX is up 91% of the time (21 out of the last 23 cycles) with an average return of 16.64% (17.74% median) from the start of 4Q in the midterm year through the end of 1H Year 3 of the Presidential Cycle," BofA said. "16 out of 23 cycles saw double digit positive returns over this period. The last two cycles had below average positive returns, but the last time this period had a negative return was from 4Q 1938 through 1H 1939."

However, the note didn't mention other factors that are more unique to the 2022 midterm election year, especially the Federal Reserve's aggressive monetary tightening campaign that's meant to bring down inflation at 40-year highs.

In addition, the improving electoral prospects of Democrats this cycle wasn't included. Investors often prefer divided government over one party controlling the White House and Congress.