I think the author is saying that characters in Tolkein's world, who gave him the name 'Gandalf'='Wand Elf' must have thought him to be an elf, which would be evidence that those characters don't think it strange for an elf to have a beard.
Surely his name having "modifier+elf" in it shows that he's recognised as distinctly not an elf, nor recognisable as one, but is considered to have elf-like characteristics. I don't think it tells you anything about whether it's strange for an elf to have a beard.
So just because he's called "modifier+elf" doesn't mean they didn't think he's a proper elf.
It’s like they have a blind spot and just can’t see it