2020 was a year to be remembered, characterized by the rapid spread of COVID-19, an aggressive policy response, polarizing politics, and vaccines expected to bring an end to the pandemic. Despite accelerating infections, stock and bond markets rallied strongly during the final quarter as investors focused on recovery and markets benefited from government stimulus. The US economy grew 33% year-over-year in the third quarter, following a 31% year-over-year decline in the prior quarter. In December, the President signed a sweeping $900 billion rescue package to deliver much-needed relief for small businesses, unemployed Americans, and health care workers. This was the fifth bill enacted in response to the pandemic. The Federal Reserve Bank continues to be accommodative with near-zero overnight interest rates and $120 billion monthly purchases of US Treasury and mortgage-backed bonds.
US stocks performed strongly in November and December, achieving multiple record highs. Market performance has been tied to progress on a coronavirus vaccine, aggressive fiscal and monetary policy actions, and business resilience amidst rising COVID-19 cases. Until recently, most US stock gains in 2020 were driven by large technology companies that capitalized on shelter-in-place restrictions. As tech companies become fully valued, investors have begun to shift capital toward other market sectors which traditionally perform well during economic recoveries. US stocks ended the quarter up 12.1%, and 18.3% for the year. Overseas stock markets outperformed in 4Q as many foreign governments eased lock-down restrictions. International developed-market stocks rose 16.1% in 4Q and 8.2% for the year. Emerging market stocks produced gains of 19.3% last quarter and 15.8%for the year.
Bond yields have steadily risen since last August, evidenced by the increase in the benchmark 10-year US Treasury yield from 0.5% to 0.9%. While the vaccine rollout may take several months, bond markets appear to be pricing for growth and a possible inflation uptick. The Fed indicated it will remain accommodative with low short-term interest rates and aggressive asset purchases for the foreseeable future. Taxable bonds were up 0.7% last quarter and 7.5% for the year. Tax-free municipal bonds rose 1.0% in 4Q and 4.2% in 2020.
We remain optimistic heading into 2021. We expect consumer and business activity to recover as the COVID-19 vaccine distribution broadens. Supportive monetary and fiscal policies should bolster economic growth. We do not anticipate major tax reform or business regulatory reform legislation from the incoming Biden administration, which should bode well for corporate earnings. Nevertheless, it’s likely that market volatility will continue as we navigate out of the pandemic. Our investment strategy remains disciplined and diversified across and within asset classes. In the long-run, we believe markets will rise and the economy will grow despite pandemics and political configurations.