- Tensions between the U.S. and North Korea heated up after President Trump issued a stark warning to the Asian country.
- North Korea responded by saying it is exploring the idea of hitting U.S. territory Guam with a missile strike.
- Stocks fell while traditional safe havens caught a bid.
U.S. equities closed lower on Wednesday as U.S.-North Korean relations heated up.
The Dow Jones industrial average fell 36.64 points to close at 22,048.70, with Walt Disney contributing the most losses. The 30-stock index snapped a streak of nine straight record closes in the previous session.
The closed just below the flatline at 2,474.02. The index fell as much as half a percent, with utilities leading decliners. The Nasdaq composite lagged, falling 0.28 percent to 6,352.33.
North Korea responded by saying it was "carefully examining" the idea of a missile strike on Guam, a U.S. Pacific territory.
"A North Korean military strike would unambiguously constitute an act of war against America. I therefore have full confidence that Kim Jong-un will not take such a drastic step," said Jeremy Klein, chief market strategist at FBN Securities. "Hence, the volatility that arose since yesterday afternoon should soon subside."
Nevertheless, traditional safe havens jumped, with the benchmark 10-year U.S. note yield hitting its lowest level since June 28 and gold futures surging more than 1 percent. The Swiss franc, meanwhile, was on track to post its biggest one-day gain against the euro in more than two years.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, hit a one-month high.
"Despite the threat from President Trump yesterday, markets are hoping that tensions will subside during coming weeks. Hence the relatively small 7 bp fall in UST 10 year yield, and the restrained increase in the price of gold. Such investor hopes are also reflected in US equity prices," said Komal Sri-Kumar, president of Sri-Kumar Global Strategies, in a note.
"For all these variables to move significantly further would require an actual act of hostility — signs that the U.S. is preparing an attack on North Korea and/or actual launching of missiles by North Korea, for example. If such an event happens, the market reaction is likely to be far more pronounced."
Defense stocks spiked, with Lockheed Martin, Raytheon and Northrop Grumman all hitting record highs.
Stocks overseas fell sharply, with the German Dax and the French CAC 40 sliding 1.1 percent and 1.4 percent, respectively. South Korea's Kospi declined 1.1 percent while Japan's Nikkei 225 pulled back 1.3 percent.
"I think this is a buying opportunity" in international stocks, said Janet Brown, president of FundX Investment Group. "Today's reaction I think is going to be pretty short lived." Overall, international stock markets have outperformed the U.S. thanks in large part to an uptick in global economic growth.
Wall Street also focused on corporate earnings from Disney. The company posted better-than-expected quarterly earnings but its sales missed expectations. The media giant's stock dropped approximately 4 percent and shaved off about 30 points from the price-weighted Dow.
Calendar second-quarter earnings have been mostly strong. More than 70 percent of S&P 500 companies that had reported posted better-than-expected earnings while 69 percent have beaten of sales, according to data from Thomson Reuters I/B/E/S.
The strong earnings season helped propel U.S. stocks to record highs. The Dow even broke above 22,000 for the first time last week.
But Scott Wren, senior global equity strategist at Wells Fargo Investment Institute, said the Dow reaching 22,000 is an "indication that stock market valuations are stretched."
"Whether you are looking at ratios such as price-to-earnings, price-to-book, or price-to-sales, stocks are trading at the highest levels in at least 10 to 15 years. If the economy and earnings growth were poised to accelerate meaningfully and consistently over the next 18 months, we could make an argument that current market levels are 'fair,' but that is not what our analysis suggest," he said.
In economic news, productivity in the second quarter rose 0.9 percent, more than the expected gain of 0.7 percent. Mortgage applications rose by 3 percent last week, boosted by a drop in rates. Wholesale trade data showed inventories posted their biggest gain in six months.
—CNBC's Alexandra Gibbs contributed to this report.