Fourth Quarter 2010 Financial Market Review, featuring Roddy Cummins, Senior Vice President and Chief Investment Officer at GuideStone Capital Management.

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It is indeed a happy New Year for investors as they look at the performance of their investment portfolios from 2010. Financial assets posted solid returns across all major investment segments during the year. Equity prices around the world posted double digit returns, with the S&P 500 Index up more than 15%.

The past 18 months have been a strong period of wealth rebuilding. It’s a good thing, too, given the damage done to personal balance sheets during the financial crisis of 2008. While equity markets have not made it all the way back to previous highs, our wealth indicators show that investors who maintained their asset allocations through those tough times and were able to continue contributions to their savings plans have made significant progress in fully recovering their account balances.

The driver of this good news is an economy that is clearly improving. While no one is predicting robust economic growth ahead, we came a long way in the second half 2010 in casting a more optimistic future. You may recall that just six months ago, the US economy failed the test of being able to sustain growth without government stimulus. This resulted in a mid-summer swoon in economic growth that ushered in more hand-holding by the U.S. government in the form of a second round of Federal Reserve stimulus and the recent tax package that was just enacted. That tax package is designed to put more money in consumers’ hands and promote business investment. While short-lived, it will be good for growth.

Risk assets are back in favor as equities are now up 24% from the mid-summer lows of 2010, and a staggering 93% from the market trough less than 2 years ago. Bonds posted solid gains in 2010 as well. But with rates starting the new year very low, bonds will be hard pressed to pull off a repeat performance in 2011 in the face of a (1) growing economy that may put upward pressure on interest rates and (2) concerns by many that inflation will inevitably reappear down the road. Equities, on the other hand, will remain tethered to the fortunes of the economy.

The buzz words for 2011 will likely be “sustainable economic growth.” The key question that has been on our mind and the minds of investors for a long while now is “when will this economy be able to stand on its own two feet without the support of government stimulus packages?” To do so, it must overcome some serious effects that still linger from the financial crisis, most notably the consumer, whose spending represents almost 70% of the economy and whose confidence remains fragile. Deleveraging pressures still exist. The housing market remains depressed. And unemployment rates are uncomfortably high. As a result, personal income is being directed more to savings and debt retirement, leaving less available for spending and thus taking some of the wind out of growth.

Economic indicators are now consistently posting positive surprises, so there are reasons to be optimistic. But even though we are on the path to recovery, it is by no means complete and dangers do exist globally that could derail an otherwise encouraging outlook. Those include the resolution of Europe’s sovereign debt crisis, global currency dynamics and China’s ability to effectively manage its economic growth. And make no mistake about it, there will be a day of reckoning for all of the government debt that has been created over the past two years. So, while the outlook is positive, we are encouraging investors to maintain realistic expectations about future economic growth. Economic growth is after all the fuel that generates corporate profits and ultimately determines the level of equity prices. If things play out as expected, look for continued economic healing in 2011 but be prepared for a prolonged period of below average investment returns. Finally, be ready to weather more volatility, because while the prospects for health are improving, like a very sick patient, periodic setbacks can occur on this road to recovery, leading to the possibility of a wide-range of ups and downs in the coming year.

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.

GuideStone Funds shares are distributed by BNY Mellon 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.

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.

Small and mid-sized company stocks are generally riskier than large company stocks due to greater volatility and less liquidity.

Foreign securities may involve additional risks, such as political instability, reduced market liquidity and currency volatility.

High yield securities, commonly known as junk bonds, are generally considered speculative and are subject to greater risks than higher-rated bonds even though they usually offer higher yields.

Securities of emerging countries may involve additional risks including price volatility, reduced liquidity, currency fluctuation and financial reporting requirements as well as political and economic instability.

There is a risk that value-oriented investments may not perform as well as the rest of the U.S. stock market as a whole. In the past, value stocks have tended to lag the overall stock market during rising markets and to out perform it during periods of flat or declining markets.

Real estate investment trusts (REITs) involve risks not associated with investing in stocks. Risks include declines in the value of real estate, general and economic conditions, changes in the value of the underlying property and defaults by borrowers.