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

The year 2007 was an overall satisfying one for investors as stocks and bonds posted returns that were generally near historical norms. Unfortunately, signs of a slowing U.S. economy and a host of other cyclical economic concerns weighed heavily on the minds of investors over the closing months of 2007, and a fourth quarter decline in global equity markets ended 2007 on a disappointing note. Despite increasingly wide swings in performance during the year, investors in stocks and bonds achieved similar results, yet investors that maintained balance and diversification among asset classes achieved their results with noticeably less volatility than the equity markets alone.

With equity markets near all-time highs at mid-year, a change in market sentiment toward a more cautious outlook grew out of concerns over future economic growth. Problems in the financial and housing sectors related to sub-prime mortgages were compounded by issues characteristic of late-stage economic cycles (i.e., tighter credit standards, inflation, slower economic growth and a decline in the growth of corporate earnings). These concerns rapidly impacted liquidity and valuations on a global scale, leading to a re-pricing of risk throughout the capital markets and a change in market leadership. Quick and decisive action by the Federal Reserve and other central banks to reduce interest rates and inject liquidity provided a temporary reprieve to market concerns. Yet, many of the economic concerns that surfaced during the year will likely provide continued challenges into 2008.

For investors, worries over future economic growth resulted in a shift in market leadership toward more defensive, high-quality investments. Within the bond market, a “flight-to-quality” sparked a strong rally in U.S. Treasury securities. In the equity market, strong performance from high-quality growth companies signaled a preference among investors for companies whose earnings are more sustainable in slower economic periods. Among major asset classes, performance was led in 2007 by international stocks, which received a boost from emerging markets and a declining U.S. dollar. The MSCI®-ACWI Ex-U.S. posted a return for the year of 16.65%. By contrast, the U.S. equity market, as measured by the S&P 500®, posted a return of 5.49%. The Lehman Brothers Aggregate Bond Index, representative of the U.S bond market, returned 6.97% for the year.

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.