U.S. stock futures sold off on the news, while international stock markets pulled back. In Europe, the Stoxx 600 index fell 1.04 percent, while Asian stocks closed broadly lower.
"It seems like the initial anxiety has left the market for the moment," said Daniel Deming, managing director at KKM Financial. "I think the overnight markets were reacting to the unknown factor."
Japanese Prime Minister Shinzo Abe told reporters the missile fired by North Korea was a ballistic missile that flew over Japan.
President Donald Trump said in a statement Tuesday that "all options are on the table" for dealing with North Korea.
Investors increased their exposure to traditional safe havens after the news broke, including gold and U.S. Treasurys. Gold futures for December delivery rose 0.27 percent to settle at $1,318.90 per ounce — its highest level since September 2016 — while the 10-year Treasury yield hit its lowest level since November.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, briefly rose more than 20 percent before holding about 4 percent higher.
"I think [Steve] Bannon sort of laid out how this thing is going to play out," said Crit Thomas, global market strategist at Touchstone Investments. "There's not much we can do. Our hands are tied."
Bannon, the former chief strategist to Trump, said in an interview with the American Prospect earlier this month that there is "no military solution" to North Korea.
Tensions between the U.S. and North Korea had risen earlier this month after Trump said North Korea would face "fire and fury" if it continues to make threats to the U.S. Equities pulled back before rebounding slightly.
In economic news, the S&P CoreLogic Case-Shiller home price index rose slightly from May to June. Consumer confidence hit 122.9 in August, higher than the expected number of 120.3.
On Monday, stocks closed little changed as investors digested the aftermath of Hurricane Harvey, which crippled Houston and other parts of South Texas. Houston is home to several major U.S. oil refineries.
—CNBC's Christine Wang contributed to this report.