The fireball at the muzzle is definitely the combustion of incompletely burned gunpowder - otherwise there wouldn't be any fireball (air alone doesn't burn). Yes there is a big fireball with a .357 snubby, and yes this does mean that a good bit of the cartridge potential is lost as muzzle blast.
However, if you look at the velocity figures, while a 2" .357 won't do what a 8" .357 will do (off by about 25% I'd say offhand), on the other hand, it still does a good sight better than a 2" .38 +P will do.
Of course, you can't just focus on velocity when choosing a best defense gun. So I'd also consider your ability to control the gun while shooting quickly. There is no way to max out ballistic impact and simultaneously max out speed and accuracy of delivery. It's a compromise between these competing objectives. Everyone has a different idea of where the best point on the curve lies - no "right" answers.
“Never express yourself more clearly than you are able to think.”