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

The bull market in equities appeared to be “long in the tooth” entering the third quarter of 2007 and by mid-July, woes in the subprime mortgage lending sector had begun to infect previously unaffected areas. Just days after reaching new all-time highs, most equity indices succumbed to a dizzying bout of increased volatility and selling.

It took a surprise 50 basis point cut in the discount rate by the Federal Reserve on August 17th to halt much of the decline and then, a larger-than-expected 50 basis point cut in the Fed Funds rate on September 18th to bring investors back into equities.

In spite of market crises, the broad U.S equity market as measured by the Russell 3000® Index managed to post a 1.55% gain for the third quarter, with the large-cap oriented Russell 1000® Index adding 1.98%. However, the small-cap oriented Russell 2000® Index lost 3.09%. For the quarter, growth stocks outperformed value across the market capitalization spectrum, with the performance gap widening on a year-to-date and 12-month basis.

Prices of public real estate securities, including REITs, bottomed out in August before staging a mild comeback through the end of September. The Dow Jones Wilshire Real Estate Securities Index gained 1.44% for the quarter.

Non-U.S. stocks are leading domestic stocks year-to-date. The MSCI® All Country World ex-U.S. Index (Net), representing both developed and emerging international markets, turned in a 4.62% total return for the third quarter. Developed international stocks, as represented by the MSCI® EAFE Index, posted a return of 2.18% during the quarter, despite lagging performance in the United Kingdom and Japan. Emerging market stocks, as measured by the MSCI® Emerging Markets Index, led all asset classes with a remarkable 14.42% return, primarily led by returns within China, India and Brazil. As of the end of the third quarter, this index was up over 34% year-to-date and 58% over the preceding twelve months.

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 and 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.