The arrival of May means the beginning of a six-month period in the stock market when returns are mediocre and often negative. Since 1950, the Dow Jones Industrial average has returned roughly 7.4 percent from November through April and a paltry 0.4 percent from May through October.

A seasonal timing strategy suggests you shift your holdings out of stocks into bonds and return to the market in November. It would appear a lot of people chose to adhere to this strategy this year. In fact it was the worse May for stocks since 1962.

In 1962 stocks plunged 30 percent as sentiment was squashed with the failed Bay of Pigs invasion and the Cuban Missile Crisis.

This May saw the Morgan Stanley World Composite Index (MSCI) close down 10 percent. The market sell-off was broadly based with every sector down at least 6.7 percent.

Hardest hit were energy and financial shares which were down 12.6 and 12 percent respectively. Consumer staples, health care and telecom companies were the relative outperformers ending the month down 6.7, 8.2 and 8.2 percent respectively.

All gains made in the first quarter were quickly erased with the MSCI ending the month down 7.6 percent on the year. Although fundamentals have improved in the United States, concerns over European growth and Chinese deflation have intensified a wide array of concerns.

The crisis in Europe is not to be dismissed but it is also important to analyse its scope. The troubled peripheral countries of Europe (Portugal, Ireland, Italy, Greece and Spain) account for only 7.5 percent of global gross domestic product.

In fact, according to BCA Research, the exposure of US corporate profits to the eurozone is only nine percent. If you assume a 30 percent decline in the euro, S&P 500 earnings would be lowered by only four percent.

China's core consumer price inflation level hit the lowest point since 1966. Mild deflation of -2.4 percent to zero is historically positive for stocks. According to the Leuthold Group, during these periods of mild deflation, twelve month total returns for stocks averages 18 percent.

Largely overshadowed by the trouble overseas was a relatively strong earnings season in the United States. Of the 493 of the 500 companies in the S&P 500 to have reported first quarter earnings by the end of May, 77.6 percent of them reported earnings that were ahead of analyst estimates. Average growth in earnings from the first quarter of 2009 was 52.4 percent.

Excluding financial shares earnings, companies in the S&P 500 grew 38 percent from the first quarter of 2009. Analyst estimates for 2010 for the S&P 500 earnings are $81.

The S&P 500 is trading at 13.4 times this estimate which is below its long term average of 14.5 times. We see a similar story in Asia; the MSCI Asia Pacific ex-Japan Index forward price/earnings ratio is now just 10.8 times 2010 expected earnings, more than one standard deviation below the long term average of 13.7 times.

Going forward we would expect continued volatility associated with numerous structural issues. The yield curve is suggesting a virtual zero chance of a double dip recession and we expect to see a more square root recovery - the sharp V- bounce followed by a prolonged period of slower growth.

Nathan Kowalski is the chief financial officer at Anchor Investment Management. He holds a Chartered Financial Analyst (CFA) designation and Chartered Accountant (CA) designation.