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

For another quarter, equity markets around the globe continued to confound the skeptics. The strong performance of the stock prices of companies across many countries, sectors and industries is being driven by a variety of factors. From a fundamental perspective, investors are positively interpreting signs that the economies within developed market countries have stabilized and outright growth is occurring in several leading emerging market countries. A number of countries appear likely to leave recessionary territory earlier than expected, and investors also seem to be looking ahead, seeking to participate in an expected cyclical rally. Another compelling motivation for embracing risk is the high opportunity cost of remaining in cash, where yields are close to zero. High cash levels accumulated by investors since last fall are being drawn down, and although much of these funds are flowing into fixed-income markets, a notable amount is being lured back into equities. However, much of the flows into stocks have continued to be into some of the more “riskier” stocks — shares of companies with weak balance sheets and cash flows.

After a notable drawdown to start the third quarter, another leg up in the stock market’s resurgence began July 13. In the U.S., benchmark indexes such as the S&P 500® Index and Russell 1000® Index rose 15.61% and 16.07%, respectively during the third quarter. The S&P 500® Index finished the third quarter over 58% above its March 6 intraday “low” and, once again, posted one of its best quarterly returns. The broader U.S equity market, as measured by the Russell 3000® Index, gained 16.31%. The strongest returns came from the Financial Services sector (+24%) and the Materials and Processing sector (+23%). Emerging country stocks continued to lead, and a falling U.S. dollar helped to 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 19.69%. In addition, over the last 12 months, most foreign stock indexes have now zoomed ahead of those measuring U.S. stocks.

In the U.S., there remained ample evidence that the economy may have moved closer to turning a corner. Third quarter Gross Domestic Product figures to be released at the end of October are now expected to show the economy returning to a positive trajectory — perhaps substantially so. That said, the pace of the equity market’s torrid advance cooled somewhat in September. A number of newly released economic data points — including foreclosure activity, still-depressed levels of consumer confidence, tepid manufacturing activity and a lack of clear improvement in employment— all served to temper enthusiasm.

The prices of many commodities staged a revival during the quarter, as global economic growth prospects appeared to brighten to some extent in emerging market countries.

In terms of equity market capitalization and style, everything (small, mid, large; growth, core, value) was up substantially during the third quarter; it was just a matter of degree. Small-cap companies outpaced their large-cap counterparts by more than 3% based on Russell 2000® Index and Russell 1000® Index performance. In the small-cap space, value beat growth by almost 7% led by the Financial Services and Consumer Discretionary sectors. The Russell 1000® Value Index and Russell 1000® Growth Index had total quarterly returns of 18.24% and 13.97%, respectively. Over the last 12 months, growth led value by about 9%.

The developed international stock market index, represented by the MSCI EAFE Index (Net), recorded another stellar quarterly return (+19.47%). From a country perspective, notable strong performance came from equity markets in Australia, the Netherlands, Greece and Austria. However, returns were again subdued for large index component Japan where a strong Yen has hurt exporters. The Japanese equity markets were up only 6.5% for the third quarter. Once again, emerging market performance exceeded the developed market returns, as investors perceived enhanced growth opportunities in spite of already large investment inflows over the year. As measured by the MSCI Emerging Markets Index (Net), these stocks gained 20.91% for the quarter and are now up a little over 19% over the last 12 months. Excitement over evidence that growth in China has resumed strongly led to a speculative bubble of sorts in the local Shanghai Chinese stock market. Prices corrected sharply, however, in August and returns for the quarter in China ended up somewhat muted. In contrast, certain Eastern European and South American stock markets saw third quarter returns of more than 30% to 40%. Stock market in Indonesia and South Korea also experienced returns in the mid-30% range.

Continued signs of stabilization helped to boost the stock prices of many public real estate companies, including REITs during the third quarter. The strong performance was driven by continued improvement in credit markets coupled with modestly better-than-expected earnings reports that benefited from lower expenses. In addition, a number of REITs tapped the equity markets and each of these issuances was met with robust demand. The Dow Jones U.S. Select Real Estate Securities Index gained 35.86% for the quarter. However, this index is down almost 30% from a year ago.

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.