By Martin E. Landry, CFA, CFP®, CIMA®, CIPM Senior Investment Analyst

For equity markets, the second quarter of 2009 began much like the first quarter ended: continuing the rally that started in March. The stock market’s resurgence was frequently referred to as "less bad" than the last few months. Healing began in the banking system and credit markets, and experts are more optimistic about the impact of massive fiscal stimulus and monetary policy initiatives. Measures of financial stress, including bond spreads and options volatility, steadily decreased as investors regained some of their appetite for risk. Fears of a “depression” scenario began to fade.

U.S. large-capitalization equities rallied back to life and began the process of recapturing the lost ground. Key benchmark indices S&P 500® Index and Russell 1000® Index rose 15.93% and 16.50%, respectively, for the quarter. The S&P 500® Index finished the quarter 36% above its March 9 “low” and posted its best quarterly return since 1998. The broader U.S equity market as measured by the Russell 3000® Index gained 16.82%. Emerging country stocks soared and a falling U.S. dollar helped push international stocks ahead of domestic stocks during the quarter. The MSCI® All Country World ex-U.S. Index (Net), representing both developed and emerging international markets, rose 27.59%. However, over the last 12 months, most foreign stock indexes remain deeper in the red than those measuring U.S. stocks.

As summer approached, some of the vigor behind the market rally dissipated. Rekindled concerns about the actual strength of the economy — including rising unemployment, tepid retail sales and enormous state government budget deficits all served to temper enthusiasm. Equity returns for the month of June were muted and for some, slightly negative. 

Many commodity prices staged a revival during the quarter as global economic growth prospects appeared to brighten to some extent in emerging market countries. Crude oil had its largest quarterly percentage price increase (about 35%) since 1990.

The second quarter yielded a blend of similar and disparate results for equity market capitalization and style. Higher “beta” and lower-quality equities tended to lead the overall market higher. Companies with negative earnings and those not paying dividends also outperformed. Small-cap companies outpaced their large-cap counterparts by about 4.2% based on Russell 2000® Index and Russell 1000® Index performance. Growth and value essentially were in a dead heat across the broad market and large-and medium-capitalization arenas. Value indices were matched by strong performance in technology and industrial companies in growth indices. The exception to that pattern, the small-cap space, where growth topped value by well over 5% led by the technology and consumer discretionary sectors. The Russell 1000® Value and Russell 1000® Growth indices had total quarterly returns of 16.70% and 16.32%, respectively. Over the last 12 months, growth led value by about 4.5%.

The developed international stock market index, represented by the MSCI EAFE Index (Net), recorded its highest quarterly return in over 20 years during the second quarter (+25.43%). From a country perspective, notable strong performance came from the Nordic countries, Canada, Singapore and Spain. Emerging market performance exceeded the developed market returns, as signs of stronger Chinese growth and rising commodity prices reinvigorated investment inflows. As measured by the MSCI Emerging Markets Index (Net), these stocks leaped 34.73% for the quarter. Exceptional rallies occurred in the “BRIC” countries of Brazil, Russia, India and China.

Although facing a continued difficult operating environment, public real estate companies, including REITs, raised much needed capital in the second quarter. This sign of stabilization helped boost the stock prices of many REITS, albeit with ongoing elevated day-to-day volatility. The Dow Jones U.S. Select Real Estate Securities Index gained 31.69% for the quarter. However, this index is down over 45% from a year ago.

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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.