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Second Quarter 2013 Financial Market Review

Barring a major setback in economic growth, investors got a glimpse in the second quarter as to what the future holds for Federal Reserve (“Fed”) policy. We know that the Fed has made extensive use of policy guidance since 2008, and this guidance has been successful in calming fears and stabilizing markets during uncertain times. In more recent periods, Fed leaders have provided assurances and have been very open about their intentions to do “whatever it takes” to restore economic growth and put Americans back to work.

Now that the U.S. economy is showing signs of sustained improvement, the Fed takes on the next challenging job, that of weaning the economy and markets from the antidote of market intervention and massive stimulus. The first step in this process is reducing the Fed's open market bond purchases, a strategy that until now has been an important control mechanism for keeping interest rates low. The program reduction was announced in June by Fed Chairman Ben Bernanke, and as we experienced, the markets reacted quickly and sharply.

U.S. stocks ended the quarter higher, albeit with a lot of volatility. The S&P 500® Index absorbed a near 6% correction but posted 17 new all-time highs on the way to a return of 2.91% during the quarter, bringing the year-to-date return to an impressive 13.82%. For stocks outside the U.S., the prospects for slower economic growth in other major regions of the world, including emerging markets, led to a widening gap in stock returns compared to those in the U.S. For the second quarter, non-U.S. stocks as measured by the MSCI ACWI Ex-U.S. returned -3.11%. With interest rates rising sharply in May and June, bond returns suffered during the period with the Barclays Aggregate Bond Index returning a disappointing -2.32%.

We believe the recent announcement by the Fed represents the beginning of an important new phase in managing the economic recovery. What will this look like for investors? First, if the economy continues on its path of improvement, investors should expect the Fed to stay true to the recently announced plan to shift its interest rate objectives and policies. Indeed, the bond market is now clearly indicating expectations of higher interest rates over the next few years. Secondly, if June is any indication, this transition of Fed policy will likely introduce more volatility into equity markets. If the economy continues to improve toward normalization, moderating Fed policy could be met with resistance from equity investors that have enjoyed a financial windfall on the back of the last four years of aggressive monetary policy. Lastly, despite the transition toward less monetary stimulus, we believe that a shift in Fed policy is not only inevitable, but in the long-term is good for investors. We believe the Fed will continue strong economic growth policies, which provides strong support and opportunities for risky assets held by investors that have patience, an appropriate risk tolerance and the discipline to ride out periods of high volatility.


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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 Capital Management, a controlled affiliate of GuideStone Financial Resources, serves as the investment adviser to GuideStone Funds.