Why the bull market could survive the Fed’s big policy shift

A tale of two bull markets?

Stocks could keep marching higher even in the face of expected interest rate hikes and an unprecedented Federal Reserve balance sheet unwind.

Equity markets may face pressure in the short-term, but will likely continue their broad upward trajectory as the central bank hikes interest rates, said Torsten Slok, chief international economist at Deutsche Bank.

Slok said this is largely because as the Fed moves to gradually hike rates (with the next hike likely to come in December), the fundamental economic backdrop is improving modestly.

"The net effect is still, in our view, that we will see equities perform to the upside as the Fed goes through this exit," he said Thursday on CNBC's "Trading Nation. "

Specifically, he cited positive points from the latest employment situation report, manufacturing data and early signs of wage growth improvement.

"The broader set of economic indicators is indeed supporting the broader equity market ... and earnings should continue to look relatively decent as we look ahead over the coming quarters," he said.

In fact, Tom McClellan of the McClellan Market Report argues that the market actually hasn't been driven by the Fed for some time.

From the 2009 bottom until 2015, the market rally was driven by the Fed's policies, McClellan said Thursday on "Trading Nation." That preceded something of a pause in the rally in 2016 before a new "organic" bull market emerged and has continued to present as interest rates have risen.

"What's interesting now is that the postelection rally is happening without any QE from the U.S. Federal Reserve. You could argue, well, the Bank of Japan and the European Central Bank are still printing money like crazy, and money's fungible so it's flowing in from there. That may be true, and I don't dispute that, but we're seeing an uptrend that is not attributable to the Fed, and that's kind of the difference now," he said.

Still, Slok said, the risk he is watching at this transitionary period is the issue of running down the central bank's multitrillion-dollar balance sheet built up in the wake of the financial crisis.

"Will it be like watching 'paint dry,' as the Fed has been saying?" Slok asked Thursday, referring to a term Fed officials have used to describe their projected process of its balance sheet deleveraging.

The full interview with Tom McClellan of the McClellan Market Report