By Rodric E. Cummins, CFA , Senior Vice President and Chief Investment Officer

During the fourth quarter, global equity markets continued their explosive ascent from peak crisis levels. While this economic recovery is anything but brisk and its sustainability is questioned by many, data releases continue to support the existence of positive steps on the long road to restored health. In response, the S&P 500® Index posted a fourth quarter return of 6.04%, bringing the return to 26.46% for the full year of 2009. As of year-end, the S&P 500® Index had soared 65% off of March lows. International equity markets are also participating fully in the recovery. The MSCI-EAFE Index, a measure of international developed country returns, posted a fourth-quarter return of 2.18%, bringing the return for 2009 to 31.78%. Investors continue to favor equity investments in emerging market countries that have stronger long-term economic growth prospects than developed countries. The MSCI Emerging Market Index returned 8.55% for the quarter and 78.51% for the year ending December 31.

The nine-month equity rally continues to be fueled by investors’ growing risk appetite, expectations of continued strong corporate earnings and prospects for further improvements in economic growth. In the early stages of this recovery, companies were receiving a temporary boost to corporate earnings from productivity gains. Strong cost-cutting measures were introduced during the height of the financial crisis in anticipation of an economic collapse. As economic growth is beginning to accelerate, strong productivity gains are being recognized from a very lean corporate cost structure. Clearly, while these productivity gains and boosts to earnings are not sustainable long-term, their presence is providing a much needed confidence boost to equity investors.

Consistent with many early stage recoveries from past cycles, this equity market recovery has been led in 2009 by stocks of low quality companies. These are generally characterized as highly leveraged and economically depressed companies, whose earnings in early stage recoveries often prove to be temporarily more dynamic. These so called “junk rallies” are not uncommon and tend to be short-lived as market leadership eventually reverts back to companies with good fundamentals, sustainable business models and reasonable valuations. Signs of that rotation began to surface during the fourth quarter.

The year-long outperformance of growth-oriented stocks continued in the fourth quarter across all market capitalizations. Large cap growth stocks, up 7.94%, outpaced large cap value stocks, up 4.22%, during the quarter as represented by the Russell 1000® Growth Index and the Russell 1000® Value Index, respectively. The current period contributes further to the wide dispersion between the performance of large cap growth stocks (37.21%) and large cap value stocks (19.69%) for the year. Similar dispersions are found across mid and small cap growth and value stocks.

In terms of capitalization, the fourth quarter was led by large cap stocks at 6.07%, as measured by the Russell 1000® Index. This exceeded small cap stocks which returned 3.87%, as measured by the Russell 2000® Index. This resulted in large cap stocks returning 28.43% for the year and nudging out small caps by 1.26%.

You should carefully consider the investment objectives, risks, charges and expenses of GuideStone Funds before investing. For a copy of the prospectus with this and other information about the funds, please call 1-888-98-GUIDE (1-888-984-8433) or download a prospectus. You should read the prospectus carefully before investing.

S&P 500® is a trademark of The McGraw-Hill Companies and has been licensed for use by GuideStone Funds. The Equity Index Fund is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing the Equity Index Fund.

All indices are unmanaged and not available for direct investment. Index performance assumes no taxes, transaction costs, fees or expenses. This update is prepared for general information only and it is not to be reproduced.

GuideStone Funds shares are distributed by PFPC Distributors, Inc., a registered broker-dealer and underwriter of the funds, 760 Moore Road, King of Prussia, PA 19406. GuideStone Capital Management, a controlled affiliate of GuideStone Financial Resources, serves as the investment adviser to GuideStone Funds.