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First Quarter 2015 Financial Market Review

Moving into calendar year 2015, the U.S. economy continued to serve as the primary economic engine amidst a somewhat fragile global economy. The first quarter was characterized by an increase in volatility and caution as the U.S. economy showed some signs of moderation while certain macroeconomic crosscurrents seemed to heavily influence the tone of the markets. Despite the somewhat nervous environment, long-term, diversified investors should have experienced positive gains during the quarter as all major asset classes, with the exception of commodities, posted positive performance during the quarter.

As stated, the markets had an increasingly cautious tone during the period as it was digesting the potential impact to future economic growth and corporate earnings related to several major economic themes including: low oil prices, the appreciating U.S. dollar and the potential impact of monetary policy. Let us briefly discuss each of these factors.

Oil:

First, oil prices continued to be low, around $50 per barrel during the first quarter, or roughly half the level of oil prices in mid-2014, in response to too much supply for the current level of global demand. This reduction has had a negative impact on the energy sector especially as it relates to future capital expenditures and corporate earnings; however, the price reduction is expected to have a “net positive” impact to the U.S. economy as it, in effect, serves as a “tax cut” to the U.S. consumer, which in turn, increases disposable income and consumption of other goods and services.

U.S. Dollar:

Second, it may not be well known to many, but the U.S. dollar has appreciated roughly 20% versus other currencies since July 2014. The U.S. dollar has strengthened in response to heightened demand related to its “safe haven” orientation, the relative attractiveness of U.S. Treasury yields and the strength of the U.S. economy. While the decline in oil prices is expected to be a positive, many pundits project the strong appreciation of the U.S. dollar will hurt the U.S. economy over time as exports to other countries become more expensive and hurt overall demand for U.S. products and services. Also, a strong U.S. dollar has a negative impact to U.S. corporate earnings as profits earned abroad in other currencies are translated back into a more expensive U.S. dollar, resulting in lower earnings and higher pressure on future stock prices.

The combination of lower oil prices and the strong U.S. dollar have led many analysts to reduce corporate earnings forecasts for calendar year 2015.

1st Quarter 1 year
U.S. Stocks 0.95% 12.73%
Non-U.S. Stocks 4.88% -0.92$
Bonds 1.61% 5.72%
TIPS1 1.42% 3.11%
1 Proxy for real assets
Monetary Policy:

And third, investors became increasingly focused on the potential for the Federal Reserve to initiate its rate hike cycle and the possible turbulence it may cause to the U.S. economy and financial markets. Expect the Federal Reserve to be cautious and not raise rates before underlying economic data related to unemployment and economic growth supports such a move. The markets are currently forecasting a rate hike during the second half of 2015, albeit at a very measured pace.

With that introduction into the global economy, let us now look at the performance results for the first quarter of 2015.

The U.S. equity market continued its bullish ways during the quarter as the S&P 500 Index® posted a quarterly return of 0.95%. During the quarter, small-cap stocks, as measured by the Russell 2000® Index, were the best performers in the U.S., posting a quarterly return of 4.32%, as these companies, in general, were considered less impacted by the appreciating U.S. dollar compared to their large-cap counterparts. From a sector perspective, the health care and consumer discretionary sectors were the top performers, while both the energy and utilities sectors lagged.

Non-U.S. stocks, both in the developed and emerging markets, posted solid quarterly returns in response to an improving banking system and accommodative monetary policies, including the implementation of quantitative easing programs. In local currency terms, returns were robust but were partially offset by the strong dollar for U.S. based investors. Non-U.S. stocks and emerging markets stocks generated quarterly returns of 4.88% and 2.24%, respectively, in U.S. dollar terms.

Bond markets continued to surprise many on the upside as U.S. Treasury yields declined across most of the yield curve from already historically low levels. The declining yield environment proved to be a tailwind for bond investors as the broad bond market, as measured by the Barclays U.S. Aggregate Bond Index, posted a quarterly return of 1.61%. The U.S. bond market was led by the investment grade corporate bond sector and high yield bonds. In general, bonds with longer durations, given their greater price sensitivity to interest rate changes, outperformed shorter duration bonds.

Real assets are inflation sensitive investments used by investors to provide their portfolios a defense from unexpected spikes in inflation. Inflation expectations were benign during the quarter, leading to a difficult environment for several real asset strategies, most notably commodities and natural resource equities. Global real estate securities performed best, posting a quarterly return of 3.97%, in response to investors seeking yield-oriented securities. U.S. Treasury Inflation Protected Securities (“TIPs”) posted a quarterly return of 1.42%.

What should investors expect going forward?

Expectations for both the bond and equity markets should be of higher volatility and more muted absolute returns compared to historical long-term averages as the macro-economic climate is somewhat uncertain and the risk-free rate remains near zero. At GuideStone, we believe the best way to combat this environment is through patience, a long-term time horizon and prudent global diversification across asset classes. If you have not done so, let this be a time to revisit your portfolio’s asset allocation to ensure it aligns with your overall risk/return profile.


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

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