NEW YORK (Money Magazine) - Considering that the recession ended a year and a half ago, it's remarkable the way investors keep finding new things to worry about.

The latest include deflation, the soaring deficit, the falling dollar and a Fed that's running out of ammunition because it can't cut short-term interest rates much further.

There's little evidence, however, to justify those fears. When you look at all the available data, the economy is really in better shape than investors seem to think.

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Obviously, shareholders have good reason to be unhappy. The bear market's decline from peak to trough was brutal, as the Dow fell 39 percent and the Nasdaq plunged 78 percent.

And although the recession lasted only 10 months, the stock slump has dragged on for more than three years. Those figures compare with a 27 percent median decline for the Dow and an average 15-month duration for bear markets since 1900.

Almost everyone agrees that the stock market has fared far worse than the economy warrants. The problem was simply that stocks were way, way overpriced before the bear market began.

The most popular big stocks, which have averaged a 25 P/E over the past three decades, soared to a 70 P/E in 2000.

Less glamorous blue chips, with a historical P/E of 16, reached 29. Since then, share prices have given back most of their gains. Stocks were also kicked on their way down by shocks including Sept. 11, the war in Iraq and a string of accounting scandals.

After so many unpleasant surprises, investors have come to expect the worst. But I think there's more to today's pervasive pessimism. There's a psychological, perhaps even unconscious, fear that the terrible bear market resulted not only from overvaluation but also from an economy that is really much worse than it looks.

According to this view, various shadowy problems will combine in a downward spiral to create a double-dip recession. The result will be a further decline of at least 25 percent in stocks, to the lows reached during the 1973-75 recession.

The data, however, suggest that this scenario is highly unlikely. The 1970s were a disaster economically, marked by an oil crisis, stagflation and soaring interest rates.

If you compare today's economic statistics with those at a similar point in the '70s recession -- the end of 1974, say -- it's clear that today's economy is in far better shape. So there's no reason to think that solid blue chips will have to trade at 11 P/Es before the market decline ends.

What about the latest specific concerns -- deflation, the deficit and the falling dollar? They've been blown way out of proportion.

Stock prices do well when inflation is low -- in fact, they gain more than 15 percent a year, on average, when inflation is below 2 percent. But surprisingly, they gain even more during mild deflations of 1 percent or 2 percent a year.

Severe deflation is serious, but that's nowhere in sight. Prices may be down for raw materials and some other items, but the general price level hasn't declined at all. In every month since the bear market began, consumer prices have been higher than they were a year earlier.

The deficit is another overblown issue, at least for the next few years. It's true that government deficits crowd out private capital spending and push up inflation and interest rates when the economy is booming.

But right now, there's little capital investment to crowd out. Interest rates are at 45-year lows. And a little inflation would actually bolster investment confidence by quashing deflation fears.

Ditto for the falling dollar. From its peak, the dollar is down 29 percent against the euro. That's tough on vacationers, but it will give U.S. exporters a lift by making American products cheaper for overseas buyers.

None of these trends is cause for concern. Share prices should strengthen over the next few years as investors see the economy improve and companies show successive quarters of positive earnings surprises. The market rebound is likely to be steady once it gets going.

Financial uncertainty favors large companies with little debt. Low interest rates give the greatest P/E boost to companies with above-average earnings growth rates. Mild deflation or negligible inflation benefits companies with a lot of cash on hand. That leads me to four promising stocks.

At the top of the list is Microsoft with $46 billion in cash, no debt and a 14 percent projected annual growth rate. At $24.65, the shares trade at 23 times estimated earnings for the fiscal year ending next June.

Pfizer also rates well, with $15 billion in cash against $3 billion in debt and 14 percent projected annual earnings growth. The $33 stock trades at a P/E of 16 based on projected 2004 earnings.

Johnson & Johnson, at $52.56 a share, has $7.8 billion in cash vs. $3.8 billion in debt, a 14 percent growth rate and an 18 P/E based on next year's expected results.

Among more volatile alternatives that could be turnarounds,Intel has $12 billion in cash against $1 billion in debt and a 15 percent-plus projected growth rate. The $21.36 shares trade at a 26 P/E based on projected 2004 results, which still figure to be somewhat cyclically depressed.

As long as the economy remains dicey, it's prudent to maintain a broadly diversified portfolio that includes defensive stocks as well as bonds. Just don't shun buying opportunities.

However slowly the recovery progresses, today's share prices may look awfully cheap five years from now.