How Would a Recession Affect the Solar Industry?

Mr. Lynch, I have two questions: 1. What do you think about all this talk about recession in the media? And 2. What effect could a recession have on the solar industry and solar stocks? Thanks. — J. Walker, New York.

Thanks for the question — it is a good one and a complex one. First, remember that “talk” is exactly what it is, just talk. Most of the general media is just following the crowd and the next “sound bite” story. Second I think we are ALREADY in a recession at this time. Everyone in government is so afraid to mention the terrible “R” word, that, to me, it is almost comical. I think a few “facts” instead of “myths” are appropriate here and may help to clarify and possibly reveal a “silver lining.”

To start, no recession has ever been correctly predicted by a consensus of economists. Economists, by their very nature, are always looking at lagging economic statistics, they are looking in the rear view mirror and trying to tell the public what is ahead for the economy — so forget about those “experts,” their track record is dismal at best.

Second, people think that you need high interest rates for a recession to occur, so we are safe now. Well, that is just not true. Recessions are usually proceeded by higher than average debt levels, relatively stable interest rates and a steep drop in consumer confidence. Sound familiar?

Third, a recession leads to a bear stock market. Wrong again. Remember, the stock market looks AHEAD 3 to 6 months, not in the rear view mirror. Historically, a bear market will have done the MAJORITY of its damage BEFORE a recession is even recognized by the general media. Also, conversely, when a recession has run its course, the market will have probably already turned positive and the bear market would have been long over, although the fear may still be lingering. This is why most investors miss the turn when the market reverses back up.

The Impact on Solar Stocks

I think that after this initial dose of serious pain, 2008 will turn out to be a transition year for the solar industry and for solar stocks. It may be the year where reality starts to catch up with solar stocks and the market begins to sort out which stocks and technologies it thinks will be winners and which will be losers. Regardless of what happens the long-term outlook for renewable energy’s future is bright. But in the short term, investors will have to be more astute and continue to be nimble. The current incredible volatility is a sign of an unhealthy market and one that needs time to stabilize and start to build a real base for future growth. When stocks move up or down 5% to 10% DAILY this is a sure sign that problems are coming and that, in the end, it will NOT end with a pretty picture.

As I have said in a number of previous articles, “The best way to make money, is NOT to lose it.” When the market is this volatile you just have to step aside and have patience. Remember the old Wall Street saying, “Bulls and Bears make money, Pigs get slaughtered.”

I think a recession and other factors can complicate this transition process and cause a number of problems for the industry in general and specific stocks in particular. For example:

1. A recession normally causes a drop in demand for oil worldwide. If the price of oil starts to drop we could see a continued adverse reaction in solar stocks. It will mean ZERO long term, but it could cause considerable short-term pain.

2. The supply of silicon is dramatically expanding and producers are rapidly moving forward with new factories and supplies. Meanwhile, demand has not been growing as fast as hoped and decreasing incentives (Germany) and failed legislation (principally in the U.S.) has once again highlighted the fossil fuel tinted and myopic vision of the current administration. This situation could increase manufacturer’s inventory levels and put downward pressure on manufacturer’s margins resulting in lower than projected profits for 2008 and especially 2009. Wall Street would view this unfavorably and “punish” those companies.

3. When economic times are poor, the government is less likely to institute any new tax benefits. This may cause the solar credits to be postponed until 2009 when a new administration comes to power. I certainly hope that this will not be the case, but it just illustrates the inherently risky nature of this emerging industry and that investors need to be aware of these risks and NOT be blinded by the great potential for reward.

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I have worked, for 33 years as an independent analyst and investor in small emerging technology companies. I have been actively involved in following developments in the renewable energy sector since 1977 and am regarded as an expert in this field. I was the contributing editor for the past 17 years to the Photovoltaic Insider Report, the leading publication in Photovoltaics industry that was directed at industrial subscribers, such as major energy companies, utilities and governments around the world. I currently am a consultant to a number of technology and solar related companies. I can be reached via e-mail at: Visit my website for the promotion of solar energy -

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